More on countercyclical restructuring and ZMP

by on November 22, 2011 at 7:33 am in Economics | Permalink

I have been reading some new results by David Berger (who by the way seems to be an excellent job market candidate, from Yale), here is one bit:

Finally, I discuss what changed in the 1980s. I provide suggestive evidence that the structural change was the result of a large decline in union power in the 1980s. This led to a sharp reduction in the restrictions …firms faced when adjusting employment, which lowered fi…ring costs and made it easier for fi…rms to …fire selectively. I test this hypothesis using variation from U.S. states and industries. I show that states and industries that had larger percentage declines in union coverage rates had larger declines in the cyclicality of ALP [average labor productivity], consistent with my hypothesis. The union power hypothesis is also consistent with evidence from detailed industry studies. A recent paper by Dunne, Klimek and Schmitz (2010) shows that there were dramatic changes in the structure of union contracts in the U.S. cement industry in the early-1980s, which gave establishments much more scope to …fire workers based on performance rather than tenure. They show that immediately after these workplace restrictions were lifted, ALP and TFP in the industry increased signifi…cantly.

This paper is a goldmine of information on the cyclical behavior of productivity and how it has changed in recent times.  Basically, we’re now at the point where a recession means they dump the bad workers and we subsequently have a jobless recovery.

While we’re on the broader topic, I’d like to make a few points about the recent ZMP (“zero marginal productivity“) debates between Kling, Caplan, Henderson, Boudreaux, and Eli Dourado:

1. There has been plenty of evidence for “labor hoarding”; oddly, once the ZMP workers start actually being fired, the concept suddenly becomes controversial.  The simple insight is that firms don’t hoard so much labor any more.

2. The ZMP worker concept can overlap with the sticky wage concept.  If a person is a prima donna who will sabotage production unless paid 120k a year and given the best office, that person has a sticky wage.  That same person also can be ZMP.  Very often the concept is about bad morale, not literal and universal incompetence; the ZMPers are often quite effective at sabotage!

3. No one thinks a worker is ZMP in all possible world-states.

4. The high and rising premium for good managers is another lens for viewing the phenomenon.  More workers could usefully be employed if we had more skilled supervisors, and thus the shadow value for a skilled supervisor is especially high.

5. Virtually everyone believes in the concept, although opinions differ as to how many workers it covers.  How about the people who are classified as having given up the search for work altogether?  There’s quite a few of them.  Put aside the blame question and the moralizing, can’t at least a few of these people — who aren’t even looking to work — be considered ZMP?

In any case, Berger’s concerns are more empirical and more concrete than some of the issues in those debates.  At the first link you also can find some very interesting papers, by Berger, on the cyclical behavior of price stickiness.  The observed data — surprise, surprise — are quite inconsistent with standard models.

Daniel Kuehn November 22, 2011 at 7:38 am

Would ZMP workers be ZMP if demand were higher? Presumably we’re talking ZMRP, not ZMP, right? Is this entirely a productivity story, in other words?

In the past you’ve cited the fact that output has recovered, but employment hasn’t. But we need to be careful when we say “output has recovered”. Output is higher, but not back to trend – and presumably population growth is still on trend. If output were back on trend, do you expect the issue would largely be taken care of? How much of ZMRP is a demand story?

NAME REDACTED November 22, 2011 at 5:53 pm

By demand you mean Agregate Demand?

In the words of Sims “there is no such thing as aggregate demand.”

Becky Hargrove November 22, 2011 at 8:37 am

The reason that ZMP matters to the degree that it does, is the fact that where an intermediary exists between the provider of a good and the consumer of a good, the intermediary has to conform to a single standard of production efficiency and quality time that is agreed on by basically a single world standard. That means of the possible range of production time factors, one has to be singled out in terms of being able to monetarily compete. However, when an intermediary does not exist between producer and consumer in terms of service options, the range of production possibilities opens up, because production ratios need not exist at a single world standard. The range of production efficiency possibilities becomes infinite because of the varying degrees of competency and/or work quality actually needed and possible to provide, between two participants.

Dave Hansen November 22, 2011 at 9:44 am

The paper you cite confirms what I’ve learned from a friend of mine who’s an executive for a small company (<100 employees) that works in the finance industry. In the crisis, they cut the lowest performers (i.e., those who bring in less than they make) rather than cut everyone's wages because that would give their top performers an incentive to get hired somewhere else. Why not cut the low performers during the good times? Well, it's costly. It hurts morale across the company; it's costly to find a new employee; it takes time for a new employee to adjust and learn the ropes; and there's no guarantee that the new employee will ultimately be any better the low performer you fired. In addition, executives just aren't thinking about making their company as efficient as possible when the revenues are coming in. They have other objectives on their mind at those times (bounded rationality). Furthermore, the worst performers during a crisis, especially in an industry that is directly affected by the crisis, might perform better/adequately during normal times.

Wonks Anonymous November 22, 2011 at 11:14 am

At the time you began pushing ZMP, overly optimistic GDP estimates made the output recovery appear to be greater than it actually was. Have you posted on how revised GDP estimates affect the plausibility of the ZMP hypothesis? The argument that we just haven’t had that much of a recovery in even nominal GDP and that explains the heightened unemployment sounds plausible to me.

Ed November 22, 2011 at 11:53 am

I second the above comment. I’ve never believed we were in a strong recovery, or really a recovery at all (and the latest GDP revisions seem to bear this out), so I wasn’t looking for an explanation for why employers weren’t hiring the people they had just laid off when the economic climate got better. I don’t think the economic climate got better. Now once we have the recovery, we can speculate about whether the labor market has changed, but lets get the recovery first.

CBBB November 22, 2011 at 3:41 pm

Exactly

minderbender November 22, 2011 at 12:14 pm

“In any case, Berger’s concerns are more empirical and more concrete than some of the issues in those debates.”

Indeed. A few more papers like this and he will cement his reputation for careful work with implications for policy.

The Man Who Was . . . November 22, 2011 at 1:05 pm

More workers could usefully be employed if we had more skilled supervisors, and thus the shadow value for a skilled supervisor is especially high.

BTW this is a part of the main arguments against allowing absolute unchecked immigration.

Lower IQ workers from the Third World certainly are more productive here. But this is mostly because they are being supervised by higher IQ first worlders. Past a certain point however you aren’t going to have enough of those higher IQ supervisors and productivity will start to decline. Import too many low IQ workers and they might as well still be living in the Third World.

CBBB November 22, 2011 at 3:35 pm

Bullshit Social Darwinism, go back to Bryan Caplan World.

Greg Ransom November 22, 2011 at 2:39 pm

Service workers – maids, waiters, etc. – who provides such bad service that they cost a business customers are ZMP.

Almost anyone would be a ZMP worker in some job or other — likely most jobs.

One only needs to use ones imagination to consider the importance of fitting persons to jobs they can produce non-ZMP output doing, given their costs imposed upon the poductivity of the firm & other works, and various other costs.

CBBB November 22, 2011 at 3:40 pm

Not this again, although I see your tone is changing as you seem to be starting to emphasis the lack of competent management or the lack of opportunities for which people could be productively put to use.
#2 is a pretty bad explanation, I don’t think there’s an awful lot of Prima Donnas out there. As for #3, this seems to be a change of tone for earlier posts but I think you should just hurry up and abandon this line of inquiry and go with the simpler explanation – lack of demand means there’s little reason for companies to invest .

NAME REDACTED November 22, 2011 at 5:51 pm

The new healthcare bill lowered the net MP of workers. …Just something to think about.

jseliger November 22, 2011 at 7:48 pm

“More workers could usefully be employed if we had more skilled supervisors, and thus the shadow value for a skilled supervisor is especially high.”

I wonder if this also means that teachers, professors, and mentors should spend more time trying to instruct students in how to be autonomous and how to find productive or useful activities even in the face of supervisors who might lack the skills to deploy them effectively.

Lord November 22, 2011 at 7:48 pm

Is a person that could work and chooses not to ZMP? What if the reason is because their wage would be half what it was and that is not enough inducement? ZP perhaps, but ZMP?

Lord November 22, 2011 at 7:55 pm

The morale question is the justification managers make for not hiring at lower wages, but then it is managers making workers ZMP, not the workers themselves and ZMP is an attribute of the work, not the worker. There isn’t enough work with MP .gt. 0 rather than workers.

Bryan Willman November 22, 2011 at 8:13 pm

Who believes that lack of demand is not a drag on hiring? In what world would that not be true?

BUT – All of the discussion about ZMP, stick wages, clearing wages, etc. seem to me to often miss something very important. The cost of hiring an employee is NOT just their wages. The TCE (total cost of employment) includes at least the overt and covert costs associated with regulation (and fear/risk associated with regulation), capital required for the employee to do anything, and so on. If those costs are high enough, then the “clearing wage” for ANY person for a particular job might be hyper low or even negative. A recession will force these issues into stark contrast.

youthair November 23, 2011 at 5:22 am

The new healthcare bill lowered the net MP of workers…

Gordon November 24, 2011 at 12:57 am

let’s start calling ZMP workers zompies for short

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