Results for “zero marginal product”

119 found

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.

These results are related to what I sometimes call Zero Marginal Product workers:

…a significant part of the increase in long-term unemployment is indeed due to the inflow into unemployment of workers with relatively low job finding rates. We conclude by arguing that given the increased contribution to overall unemployment of unemployed workers with inherently low job finding rates, monetary policymakers may want to exercise caution in the use of policy to respond to the level of unemployment.

The authors are Andreas Hornstein and Thomas A. Lubik.  The entire study — full of useful information — is here, and for the pointer I thank Alex in Jerusalem (we await a report).

Via Scott Sumner, while this is not my favorite structural explanation, I read of this from Siemens:

Siemens had been forced to use more than 30 recruiters and hire staff from other companies to find the workers it needed for its expansion plans, even amid an unemployment rate of 9.1 percent

…a recent survey from Manpower, the employment agency, found that 52 percent of leading US companies reported difficulties in recruiting essential staff, up from 14 percent in 2010.

In manufacturing in particular there is evidence of a mismatch between workforce skills and available jobs: while employment has fallen since January 2009, the number of available job openings has risen from 98,000 to 230,000.

Via Felix Salmon (he pulls out excellent pictures), from the IMF, using cross-country data:

For U.S. long-term unemployment the split between cyclical and structural factors is closer to 60-40, including during the Great Recession.

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.

The problem:

…Before the financial crash, there were lots of not-so-useful workers holding not-so-useful jobs. Employers didn't so much bother to figure out who they were. Demand was high and revenue was booming, so rooting out the less productive workers would have involved a lot of time and trouble — plus it would have involved some morale costs with the more productive workers, who don't like being measured and spied on. So firms simply let the problem lie.

Then came the 2008 recession, and it was no longer possible to keep so many people on payroll. A lot of businesses were then forced to face the music: Bosses had to make tough calls about who could be let go and who was worth saving. (Note that unemployment is low for workers with a college degree, only 5 percent compared with 16 percent for less educated workers with no high school degree. This is consistent with the reality that less-productive individuals, who tend to have less education, have been laid off.)

In essence, we have seen the rise of a large class of "zero marginal product workers," to coin a term. Their productivity may not be literally zero, but it is lower than the cost of training, employing, and insuring them. That is why labor is hurting but capital is doing fine; dumping these employees is tough for the workers themselves — and arguably bad for society at large — but it simply doesn't damage profits much. It's a cold, hard reality, and one that we will have to deal with, one way or another.

The solution?  Here is a paragraph which did not make the final editing cut:

…being unproductive in one job doesn’t mean a lifetime of unemployment. A worker who wasn’t worth much sweeping up the back room is suddenly valuable when new orders are flowing in and he is needed to ship the goods out the door. And if all those new orders require keeping the warehouse open late, the company may need to bring in a new night watchman. To paraphrase a common metaphor, a rising tide eventually lifts most boats. When the economy’s expanding, a worker who previously was worthless will at some point become valuable again. But this means that workers at the bottom of the economic ladder will have to wait until the entire economy has mended itself before they have the chance to improve their lot: That can be a painstakingly slow and uncertain process.

Let’s say that housing and equity values fall and suddenly people realize they are less wealthy for the foreseeable future.  The downward shift of demand will bundle together a few factors:

1. A general decline in spending.

2. A disproportionate and permanent demand decline for the more income- and wealth-elastic goods, a category which includes many consumer durables and also luxury goods.  (Kling on Leamer discusses relevant issues.)

3. A disproportionate and temporary demand decline for consumer durables, which will largely be reversed once inventories wear out or maybe when credit constraints are eased.

Those are sometimes more useful distinctions than “AD” vs. “sectoral shocks,” because AD shifts consist of a few distinct elements.

If you see #1 as especially important, you will be relatively optimistic about monetary and fiscal stimulus.  If you see #2 as especially important, you will be relatively pessimistic.  You can call #2 an “AD shift” if you wish, but reflation won’t for the most part bring those jobs back.  People need to be actually wealthier again, in real terms, for those spending patterns to reemerge in a sustainable way.  Stimulus proponents regularly conflate #1 and #2 and cite “declines in demand” as automatic evidence for #1 when they might instead reflect #2.

If you see #3 as especially important, and see capital markets as imperfect in times of crisis, you will consider policies such as the GM bailout to be more effective than fiscal stimulus in its ramp-up forms.

Sectoral shift advocates like to think in terms of #2, but if #3 lurks the shifts view can imply a case for some real economy interventions.  I read Arnold Kling as wanting to dance with #2 but keep his distance from #3.  But if permanent sectoral shifts are important, might not the temporary shifts (we saw the same whipsaw patterns in international trade) be very important too?  Can we embrace #2 without also leaning into #3?

I wish to ask this comparative question without having to also rehearse all of the ideological reasons for and against real economy bailouts.  It gets at why the GM bailout has gone better than the fiscal stimulus, a view which you can hold whether you favor both or oppose both.

Note there also (at least) two versions of the sectoral shift view and probably both are operating.  The first cites #2.  The second claims some other big change is happening, such as the move to an internet-based economy.  If both are happening at the same time, along with some #1 and some #3, that probably makes the recalculation problem especially difficult.

I see another real shock as having been tossed into the mix, namely that liquidity constraints have forced many firms to identify and fire the zero and near-zero marginal productivity workers.

There’s also the epistemic problem of whether we have #2 or #3 and whether we trust politics to tell the difference.

The Germans had lots of #3 (temporary whacks to their export industries) and treated them as such, whether consciously or not, and with good success.  Arguably Singapore falls into that camp as well.  The U.S. faces more serious identification problems, whether at the level of policy or private sector adjustment.  We have not been able to formulate policy simply by assuming that we face a lot of #3.

I would have more trust in current applied policy macroeconomics if we could think through more clearly the relative importances of #1, 2, and 3.  And when I hear the phrase “aggregate demand,” immediately I wonder whether it all will be treated in aggregate fashion; too often it is.