Results for “zmp ”

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We have already covered this topic, but the NYT has a new and interesting article on it.  Excerpt:

Shusaku Tani is employed at the Sony plant here, but he doesn’t really work.

For more than two years, he has come to a small room, taken a seat and then passed the time reading newspapers, browsing the Web and poring over engineering textbooks from his college days. He files a report on his activities at the end of each day.

Sony, Mr. Tani’s employer of 32 years, consigned him to this room because they can’t get rid of him. Sony had eliminated his position at the Sony Sendai Technology Center, which in better times produced magnetic tapes for videos and cassettes. But Mr. Tani, 51, refused to take an early retirement offer from Sony in late 2010 — his prerogative under Japanese labor law.

So there he sits in what is called the “chasing-out room.” He spends his days there, with about 40 other holdouts.

For the pointer I thank Alex.

On Twitter, Bryan Caplan asks me to clarify why zero marginal product workers do not clash with the notion of comparative advantage.  The point is simple: some workers destroy a lot of morale in the workplace and so the employer doesn’t want them around at any price.

Most of us buy into “morale costs” as a key reason behind sticky nominal wages.  If your wage is too low, your morale falls, you produce less and so the wage cut isn’t worth it.  Well, what else besides low wages makes people unhappy in their workplace?  Very often the quality of co-workers is a major source of unhappiness; just listen to people complain about their jobs and write down how many times they are mentioning co-workers and bosses.  (I do not exempt academics here.)  A “rotten apple” can make many people less productive, and you can think of that as a simple extension of sticky nominal wage theory, namely that installing or tolerating a “pain in the ass” is another way of cutting wages for the good workers, they don’t like it, it lowers their productivity, and thus it is not worth tolerating the rotten apple if said apple can be identified and dismissed.

There is no particular reason to think that ZMP workers are especially stupid or in some way “disabled.”  If anything it may require some special “skills” to get under people’s skins so much.  (Of course there are some individuals who, say for health reasons, cannot produce anything at all but they are not usually in or “near” the active labor force.)  To draw a simple analogy, the lowest-publishing members of academic departments are rarely those who make the most trouble.

To the extent production becomes more complex and more profitable, ZMP workers are more of a problem because there is more value they can destroy.  The relevance of these morale costs also varies cyclically, in standard fashion.  A company is more likely to tolerate a “pain” in boom times when the labor itself has a higher return.

Note also the “expected ZMP worker.”  Let’s say that some ZMPers destroy a lot of value (that makes them NMPers).  You pay 40k a year and you end up with a worker who destroys 80k a year, so the firm is out 120k net.  Bosses really want to avoid these employees.  Furthermore let’s say that a plague of these destructive workers hangs out in the pool of the long-term unemployed, but they constitute only 1/3 of that pool, though they cannot easily be distinguished at the interview stage.  1/3 a chance of getting a minus 120k return will scare a lot of employers away from the entire pool.  The employers are behaving rationally, yet it can be said that “there is nothing wrong with most of the long-term unemployed.”  And still they can’t get jobs and still nominally eroding the level of wages won’t help them.

In the perceived, statistical, expected value sense, the lot of these workers is that of ZMPers.

One policy implication is that it should become legally easier to offer a very negative recommendation for a former employee.  That makes it easier to break the pooling equilibrium.  There also are equilibria where it makes sense to “buy the NMPers out” of workforce participation altogether, pay them to emigrate, etc., although such policies may be difficult to implement.  Oddly, if work disincentives target just the right group of people — the NMPers — (again, hard to do, but worth considering the logic of the argument) those disincentives can raise the employment/population ratio, at least in theory.

Addendum: Garett Jones offers yet a differing option for understanding ZMP theories.

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.

… the gap between where unemployment stands now, at 9.1%, and full employment may not be as wide as it appears. But it also means more expansive monetary policy won’t be as effective in curing what ails the labor market, Andreas Hornstein, Thomas A. Lubik and Jessie Romero argue in a new paper from the Federal Reserve Bank of Richmond. “After a long period of unemployment, affected workers may become effectively unemployable,” the paper states. “If a large portion of long-term unemployed workers now finds it difficult to transition to employment, this suggests that the natural rate of unemployment may have increased.”

Here is more.  The paper itself has plenty of hypothesis-specific evidence.  For the pointer I thank David. M. Wessel.

Following up on yesterday’s discussion of wage stickiness for the unemployed and the employed (Tyler, Alex).

Imagine a farmer whose farm produces 100 bushels of wheat. He hires 10 workers to bring in the wheat, paying each of them 9 bushels. Thus, each worker carries 10 bushels, the wage is 9, the wage bill is 90, and the farmer earns 10.

Now suppose that due to climate change or a swarm of locusts the farm only produces 90 bushels of wheat. If wages were fully flexible then an equilibrium exists in which each worker is paid a wage of 8 leaving the farmer with 10 bushels as before. The farmer doesn’t want to reduce everyone’s wages, however, because that will reduce morale so he fires one worker leaving nine. Each worker now brings in 10 bushels, as before, and is paid a wage of 9, for a total wage bill of 81 leaving the farmer with 9 bushels. The unemployment rate is 10%.

The unemployed worker doesn’t want to be unemployed and offers to work for less, a lot less, say 5 bushels. Even at the lower wage, however, the farmer doesn’t want to hire the worker because the worker doesn’t generate enough additional output to justify even a low wage. In fact, in this scenario the worker has ZMP.

The best the farmer can do in response to the lower wage offer by the unemployed worker is to fire an employed worker and hire the unemployed worker at the lower wage. Eventually this will restore equilibrium but it takes time to cycle through enough firings and hirings to reach full employment. Note also that in this model the farmer only has a weak incentive to do this since in the equilibrium with 10% unemployment he earns 9, almost as much as before.  As an aside, also note that in my model the unemployed workers are simply unlucky (as I argued earlier). If they were to switch places with the employed, productivity would be just as high. The unemployed worker has ZMP but is not a ZMP worker.

Since the driving shock that lowers productivity in this model is a real factor (weather, locusts), this is a real business cycle model . That raises a very interesting point. The most that wage flexibility can do in this model is to restore full employment; wage flexibility cannot restore full output. Thus, the workers in this model have a very good reason to dislike wage flexibility. In the equilibrium in which wages fall the unemployed worker is better off by a lot but the 9 employed workers are all worse off than in the unemployment equilibrium.  In contrast, in a Keynesian model wage flexibility can restore full output not just full employment. Thus, and somewhat surprisingly, it’s easier to justify wage stickiness in an RBC model than in a Keynesian model since the gains from wage flexibility are so much higher in the latter!

Even in a Keynesian model along the lines of the Sweeney/Krugman babysitter model it will still be the case that lower wages by the unemployed don’t get you far enough to restore equilibrium–although as noted, we will need a coordination failure story in the Keynesian model since in principle everyone would be better off in that model with wage flexibility.

I find myself in the unusual position of being closer to Paul Krugman (and Scott Sumner, less surprising) than Tyler on the question of Zero Marginal Product workers.

The ZMP hypothesis is too close to a rejection of comparative advantage for my tastes. The term ZMP also suggests that the problem is the productivity of the unemployed when the actual problem is with the economy more generally (a version of the fundamental attribution error).

To see the latter point note that even within the categories of workers with the highest unemployment rates (say males without a high school degree) usually a large majority of these workers are employed. Within the same category are the unemployed so different from the employed? I don't think so. One reason employed workers are still fearful is that they see the unemployed and think, "there but for the grace of God, go I." The employed are right to be fearful, being unemployed today has less to do with personal characteristics than a bad economy and bad luck (including the luck of being in a declining sector, I do not reject structural unemployment).

To see the importance of sticky wages consider the following thought experiment: Imagine randomly switching an unemployed worker for a measurably similar employed worker but at say a 15% lower wage. Holding morale and other such factors constant, do you think that employers would refuse such a switch? Tyler says yes. I say no. If wages were less sticky the unemployed would be find employment

By the way, the problem of sticky wages is often misunderstood. The big problem is not that the wages of unemployed workers are sticky, the big problem is that the wages of employed workers are sticky. This is why stories of the unemployed being reemployed at far lower wages are entirely compatible with the macroeconomics of sticky wages.

Although I don't like the term ZMP workers, I do think Tyler is pointing to a very important issue: firms used to engage in labor hoarding during a recession and now firms are labor disgorging. As a result, labor productivity has changed from being mildly pro-cyclical to counter-cyclical. Why? I can think of four reasons. 1) The recession is structural, as Tyler has argued. If firms don't expect to ever hire workers back then they will fire them now. 2) Firms expect the recession to be long – this is consistent with a Scott Sumner AD view among others. 3) In a balance-sheet recession firms are desperate to reduce debt and they can't borrow to labor hoard. 4) Labor markets have become more competitive. Firms used to be monopsonists and so they would hold on to workers longer since W<MRP. Now that cushion is gone and firms fire more readily. What other predictions would this model make?

It would be interesting to know why Paul Krugman thinks productivity has become counter-cyclical but I believe he has yet to address this important topic.

Addendum: Paul Krugman gives his answer and The Economist offers a review with many links.