Sumner and Krugman on zero MP workers

Scott's post is here, Krugman's is here.  (My first post on the topic is here, my last post here).  Let's start with Scott, excerpt:

This post by Stephen Gordon shows US employment in 2010:3 falling about 5% below its 2008:1 peak, while output seems to have declined only about 0.7%.  This is what Cowen finds puzzling. 

But I don’t see any puzzle at all.  If employment didn’t change, I’d expect US output to grow at about 2% a year, which is the trend rate of productivity growth.  Because we are looking at a two and a half year period, you’d expect output to grow roughly 5% with stable employment.  Now assume that employment actually fell 5%.  If the workers who lost jobs were similar to those who remained employed, I’d expect output to be flat over that 2.5 year period.  Because output fell slightly, it seems like the workers who lost jobs were slightly more productive than those who remain employed.

Do I believe this?  No, for several reasons I think they were less skilled than those who remained employed.  Labor productivity growth (assuming we were at full employment) probably slowed in the most recent 2.5 years, as investment in new capital declined.  Measured productivity continued to rise briskly, partly because technological progress continues in good times and bad, and partly because those workers still employed are somewhat higher skilled, or perhaps are trying harder in fear of losing their own jobs.  So Tyler is probably right that those workers who lost their jobs have a lower than average marginal product.  I just don’t see why zero is the natural starting point for consideration of the issue, as you only get that number by making some fairly extreme assumptions about technological progress coming to a screeching halt after 2008:

A few points:

1. The claim is that some workers have zero marginal product (net of employment costs), not all workers (as Krugman inexplicably ponders for two full paragraphs), and not even all unemployed workers.  Just as a hypothetical example, if unemployment is 9.5 percent and the natural rate is 5.5 and zero MP helps account for half of that difference, that's two percent of the labor force at zero MP.  Try hiring labor for a while and see how crazy that sounds.

2. Zero MP is a property which may hold in an AS-AD equilibrium, it is not a substitute for an AS-AD view.  Krugman mischaracterizes the hypothesis here, by identifying it with "AD denialism."  In my post which Krugman links to (and indeed for years), I've made it clear that demand matters in any coherent account of the equilibrium.  

Oddly, Krugman himself stated one of the coherent versions of the Zero MP view in July 2010, and then he considered it possible and appropriately, he expressed uncertainty about what might be going on.

3. The Zero MP hypothesis is simply another way of talking about "labor hoarding," a well-known and time-honored idea, except that the labor is not in fact hoarded.  It doesn't encounter strange paradoxes and it is more intuitive than when the labor is hoarded (which appears to violate first-order conditions).  There is plenty of very specific and indeed striking evidence that the "previously hoarded labor" isn't being hoarded any more.  That same link implies that Krugman's invocation of 1983 is a red herring and probably not a good instance for finding many zero MP workers.  The "oughties" job market differs in a number of other "real" ways from the 1980s, including the fact that we've had no net job growth over the last decade, not even pre-crisis.  Here is further evidence on how productivity patterns were different during the early 1980s.

4. For another take on #3, during the job-destroying periods of 2009, per hour labor productivity growth is rising at astonishing rates, try 3.4, 8.4, 7, and 6 percent, each quarter, annualized.  That's not just the regular accretion of technological progress (though some of it may be), it is an artifact from dumping lower quality and zero MP workers.  If I look in the second quarter and see labor hours go down 7.9 percent and see per hour productivity rise 8.4 percent, well, that's no proof but I sure go hmm….

5. I would not take it for granted that "normal" productivity growth continues in times of shock and crisis.  Maybe yes, maybe no. Scott's talk of the "trend rate" is assuming that the growth and cyclical components are separable and that is begging part of the question.

6. The zero MP hypothesis helps explain why unemployment is so much more severe among the less educated and the lower earners.  In contrast, Krugman writes: "As Mike Konczal points out, basically everyone’s unemployment rate has doubled, no matter their education level or location."  In reality, that kind of multiplicative relationship is very much consistent with joint AS-AD determination, including a zero MP for many workers in the equilibrium.  I'll write an entire blog post on that question soon, and then we'll see that this result actually discriminates against pure AD theories or is at best a neutral pointer.

7. What does the zero MP hypothesis add?  First, the zero MP hypothesis explains why wage adjustments can't do the trick for a lot of the unemployed, as wages won't fall below zero.  Second, the zero MP hypothesis explains why you need steady real growth, boosting the entire chain of demand, to reemploy lots of workers and reflation alone won't do the trick.  (I still, by the way, favor reflation because I think it will do some good.)  Those predictions are not looking terrible these days.

8. The AD-only theories, taken alone, encounter major and indeed worsening problems with the data.  Year-to-year, industrial output is up almost six percent, sales up more than six percent, but the labor market has barely improved.  How does that square with the AD-only hypothesis?  Has it been seriously addressed?  Arnold Kling also has relevant comments and in passing I'll note that the "increases in the risk premium" factor is being neglected in this discussion of Kling's points. 

9. Krugman (not Scott), in particular, is proposing an alternative view with a) upward-sloping AD, b) downward-sloping AS, c) the implication that huge boosts in the minimum wage would restore the economy and employment, and d) requires a tight liquidity trap when the theoretical literature distinguishes between "interest rates literally at zero" and "interest rates near zero."  His comparison of ZIRP and ZMP does not raise those issues on the other side of the ledger.

I think Scott is underplaying some of the more detailed facts about labor markets, such as mentioned in #3, #4, #6, and #8.  Krugman simply isn't considering the stronger versions of the zero MP hypothesis and thus he is dismissive rather than confronting the very real problems in the AD-only point of view.

Addendum: Arnold Kling has more.


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