Tuesday, August 10, 2010

Higher structural unemployment?

This blog (h/t Tyler Cowen) questions whether many workers are approaching a zero marginal product (in other words, their productivity to a company is less than their wage, so they aren't hired).
I'll note that I think the "zero-marginal product worker" theme isn't quite as obvious as Cowen and philg make it seem, because (as Cowen noted once), plenty of workers who are zero-marginal product stop being so when demand increases. The example that comes to mind is an autoworker- if you've hibernated half of the factories in a country because of lower demand, then you have a massive excess of autoworkers relative to demand and they're unhirable in other industries in the short term. As auto demand picks back up, those workers are no longer zero-marginal product because you need to produce more cars.
However, it is still an interesting issue in some fields that were structurally too big (large parts of residential construction, for example).
Some choice quotes:
"Most unskilled workers in fact benefited hugely from the Industrial Revolution, but not all:
'There was a type of employee at the beginning of the Industrial Revolution whose job and livelihood largely vanished in the early twentieth century. This was the horse...the arrival of the internal combustion engine in the late nineteenth century rapidly displaced these workers, so that by 1924 there were fewer than two million. There was always a wage at which all these horses could have remained employed. But that wage was so low that it did not pay for their feed.'

"The cost of a low-skill worker has increased tremendously in the U.S. Let's look at four kinds of costs:

  • direct payments for wages and payroll taxes
  • health insurance
  • mistakes
  • employment lawsuits

The minimum wage has increased steadily in the U.S. even as the average skill of a high school graduate has fallen. The federal minimum wage was increased in July 24, 2009, 1.5 years into our current economic depression. More important, perhaps, are the heavy increases in payroll taxes over the years, notably for Medicare and Social Security."

[Note that I think he misses the point on healthcare. He thinks it's a cultural issue of refusing to deny healthcare, which may be part of it, but I doubt it's all of it. Healthcare and wages are reasonably fungible as they're converted into each other, but as minimum wages go up and companies are required to provide health insurance under the new law, that fungibility goes away and forces the functional 'minimum wage' much higher.]

"Most subtly, and perhaps most significantly, the potential cost of a mistake by an individual worker has skyrocketed. In industrial plants, the link between individual employee action and billions in losses is fairly obvious, e.g., with the Bhopal explosion. A tiny misstep in a chip factory and a wafer containing hundreds of valuable integrated circuits becomes worthless scrap. Computer networks, however, have made the potential costs of a clueless or careless office worker dramatically higher. Suppose that a company hires a low-skill not-very-alert office worker for $10/hour. This person accepts an email invitation to follow a hyperlink. One click later and the company's network is infected with a virus. Best case: IT department spends $50,000 cleaning up; worst case: customer lists, customer credit cards, and other private data are compromised, costing millions of dollars.

As the government has increased the number of ways in which an employee can sue an employer, the expected cost of litigation from each additional employee has gone up. The cost of trying out a worker who might not work out is much higher than formerly, especially if that worker is older, female, or belongs to a government-recognized minority group. It might be smarter to employ fewer higher skill workers because the chance of litigation is lower with 100 workers than with 200 workers."



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