Why is labor hoarding diminishing?

Paul Krugman offers three good explanations of why today's recessions are involving larger labor losses than in the past.  Bubble-based recessions are tougher to get out of, unions are weaker, and many leading firms face more volatility.  All taken together, these mean the incentive for labor hoarding is weaker than before (yet Krugman cannot bring himself to mention that labor hoarding models are based on…a zero MP condition.  And that a lot of the real work in the account of the cycle is suddenly being done by structural explanations.)  

We can all agree with:

1. Some workers are temporarily zero MP because demand is low. 

Are there additional factors behind ZMP-like conditions?  Those might be:

2. Some workers weren't producing much to begin with and short of retraining they aren't worth so much.

3. Some workers were better than idle, but a one-time, post-firing reorganization of production (e.g., computerizing their task) has since rendered their efforts largely unnecessary.  In other words, they are zero MP ex post but not ex ante.

4. Laid-off workers did not start off as zero MP but they will end up as zero MP as their skills and attitudes deteriorate.

5. The Garett Jones hypothesis: many laid-off workers were building up organizational capabilities, and so their perceived MP falls as the discount rates of managers rise.

6. Workers are like advertising: new developments in information technology allow us to better isolate the ones who are not adding value.

The bottom line is that we do not know how long these labor market predicaments will last.

For general background, here is a useful survey of hypotheses for the cyclicality of productivity pre-1990.  Here is a good piece on how labor hoarding and productivity measures are related.  From Arnold Kling, here are related comments from the structural side.


Surely the automatic expectation of being able to rely on a marginal product in the first place is a kind of cheating? Instead of paying for effort linearly, the game is to mass up effort to benefit from marginal output increase beyond what was paid for. Isn’t this wrong? I suppose it depends on the moral and ethical framework.

We cannot all agree that some workers are temporarily ZMP. We can all agree that they are are W>MP, which is a big difference.

If I was a policy maker, I would spend less on the semantics of the thing, there appears to be a growing number of workers whose skills are not needed anymore and education is not the solution, there a limited number of lawyers and investment bankers that we can use. If we get to a point of a permanent high structural unemployment rate what are we going to do? Those people will not just sit quietly at home (or under the bridge) waiting for death by starvation.

And what do we read from Krugman in this article?

1. An apparent longing for stronger private labor unions.

2. An explanation for a slow job recovery from the 2001 recession NOT involving George W. Bush.

Where's my camera? I need a picture of this.

I have not been keeping up with the ZMP reading so I'll have to do that before I can comment on that.

Regarding labor hoarding, though, could we take an alternative view that business units are run by budget maximizing bureaucrats, and their bosses are also budget maximizing bureaucrats?

I worked for a quasi-public firm's Training department consisting of two trainers and a training assistant (me). One of the trainers, through savvy persuasion, became the Director of Training in a brand new Division of Training, separate from HR. She hired a new trainer underling and converted my part-time position to full time.

Pay and job titles often depend on how many minions you have. When times are good, the cost of minions can be camouflaged by the upswing of a business cycle. On the way down, companies will reorganize entire business units, keeping their "top" performers and eliminating those whose wages ALWAYS exceeded their marginal revenue product.

W > MRP wasn't an efficiency wage situation. It was budget-max replacing profit max because of information asymmetries and information costs.

Job title inflation provides some evidence of this.

The whole concept of ZMP being pushed here seems like trying to slap a purely supply-side explanation onto what has been long explained by aggregate demand and wage stickiness. It's not quite as bad as the mass vacation explanation, but the magical thinking of quality metrics just doesn't jive with the mass layoffs that have occurred, especially when the "why are you not hiring" polls are predominantly led by lack of sales explanations, not lack of sufficiently qualified people. If you say that lack of sales is still ZMP since the people they would hire aren't "worth it" at the given price level, then you're just inserting theoretical baggage above and beyond wage stickiness, and the lex parsimoniae would probably prohibit that unless you get something else from ZMP that AD/wage stickiness doesn't provide--in Krugman's defense, I think that's basically his issue with ZMP. If invoking ZMP also gives you something beyond wage stickiness, then I imagine it will warrant a greater look.

I wouldn't write off ZMP completely--certainly there's a portion of the mass layoffs that consist of cutting baggage that was held back by the friction of time/paperwork/etc., but in an at-will employment environment like the US, I have a tough time envisioning a doubling of unemployment at all levels and all professions as simply ZMP at work with managers cutting underachievers.

On 3, there is no one time reorganization but perpetual on going reorganizations that increase productivity more or less continuously and demand must not just grow, but grow at a faster and sustained rate for employment to rise.

Kevin, it's not that economists think firms actually act in the way they're modeled. Instead, it's that they think when firms do what they naturally do, the labor market (ceteris paribus, etc., etc.) will through an iterative process tend to an equilibrium which can be approximated by models derived from assumptions about marginal product, wages, etc.

The whole point is to find models that work in describing the end result, but might not apply to the intermediate process. (Think statistical mechanics; you can assume that molecules are little rubber balls bouncing around and vibrating, and the model you get is essentially correct in the large scale without being correct about the details. Which, not coincidentally, is why statistical mechanical techniques can be profitably applied to macroeconomic problems.)

Interpret the debate not about how firms actually behave, but about which models most accurately describe the large scale average/equilibrium result of firm behavior.

I'd submit that if a model is so sensitive to the equilibrating process, then it's not such a good model. Other than that caveat, I'd agree with you.

high structural unemployment rate what are we going to do? Those people will not just sit waiting for death by starvation.

doing the shaking there- no need for it to be fake police). It's much better to keep it in your pocket with a passport protector/cover of the sort that Russians use themselves.

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