ZMP v. Sticky Wages

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.


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