Thursday, January 20, 2011

Zero Marginal Product Workers

There's been a lot of chatter between Tyler Cowen, Alex Tabarrok, Paul Krugman and Scott Sumner, among others, about the issue of what they call "Zero Marginal Product" workers.

In the latter link, Alex Tabarrok wrote this:

"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)."

It's not hard to imagine a model in which labor demand renders workers as zero marginal product without actually requiring the individual workers laid off to be low quality. If a factory employs a janitorial staff of 20, and all are equally good, but the factory owner shuts down half of the production space (say it was a brick factory, or something else that's been very seriously structurally impaired). Just because none of the workers are themselves identifiably zero marginal product doesn't mean that 10 of them aren't - so you can have a job-positional zero marginal product rather than a worker-specific zero marginal product. The first janitor is very productive, the second is still productive but slightly less so, the 10th is slightly positive, and the 11th has shifted negative because of business needs. So the factory owner pulls 10 names out of a hat. There but for the grace of Heaven go I.

This is a largely more optimistic view than the worker-specific zero marginal product one, because as the economy picks up again, these workers stop being zero-marginal product without requiring significant new investment in human capital. Tyler definitely understands this, because he references this exact point, but I'm not sure Paul or Alex have thought that through. The very fair question of why hiring hasn't ticked up along with economic recovery is a pretty simple one, maybe too simple - hiring lags recovery because, for a while, you can increase the productivity of existing workers through technology and having people work harder, but eventually the recovery will be strong enough that people get rehired. These are things they've mentioned before, and I have too, but are worth reprinting here for relevance.

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