Friday, 19 April 2013

UNEMPLOYED? - GO DIE IN A HOLE, YOU ZMP!



So I've recently caught up on some on-going discussions about unemployment and an interesting concept promoted by Tyler Cowen - The ZMP worker a.k.a Zero Marginal Product worker. 

I think this is mostly a new name for an old idea but it's interesting to see how it goes, what people say and some of the underlying assumptions.

I caught up with that concept when an old MR post from 2010 was linked:

"The speed of labor market adjustment
by Tyler Cowen on July 16, 2010 at 1:23 pm in Economics | Permalink

Ezra Klein reports:  Notice that adding new jobs at a rate of 200,000 a month would take us 150 months — or 12.5 years — to get back to normalcy. So far, only April has seen more than 200,000 in non-census jobs growth — and even then, just barely.

This in my view is a puzzle for all theories of labor market adjustment. Why does it take so long? This isn't one of those West European scenarios where, due to benefits, being unemployed is permanently somewhat attractive alternative for some subset of the work force. Nor is the United States a country where employers cannot fire recalcitrant workers.

Does the required "recalculation" take so long? I find myself coming back to the view that many previously employed workers simply have a current marginal product pretty close to zero".


Then, in 2011, there was a debate on Keynesian nominal wages stickiness. And, finally in 2013, we have the post that made notice this ZMP worker's theory:

"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 responded in the comments on that very post and so won't repeat myself except to summarise my point of view: I don't think people being assholes or morale destroyers is a good explanation of ZMP and, furthermore, I don't think that information asymmetry is why companies are so reluctant to hire long term unemployed in time of economic crisis.

I think this actually quite a disservice to an otherwise nerdy-but-catchy term for a real phenomenon - long term unemployment in the absence of long term unemployment benefits - that indeed salary rigidity does not explain.

I think that companies refusing to hire long term unemployed when they have a plethora of people to choose from is more or less down to prejudice, pure and simple.

In the USA, six months without work seems like some kind of cut-off point. In France, I suspect that six months would not be seen as 'long term' and would not generate such level of rejection. One year seems more intuitively correct for France (imhe, to be confirmed etc). But if the cut-off point varies according to countries, it would prove that the fact that long term unemployed are less likely to be considered by the employers has nothing to do with skills rusting away, network atrophying or signalling issues and all the explanations usually paraded to excuse or justify the discrimination against the long term unemployed. It is pure prejudice.

The sticky wage issue, I've dealt with before: Not only it's not applicable to the unemployed who are usually quite quick to adjust their salary pretensions downward but, through reduced working hours and imposed part-time etc, I think even a sizable chunk of employed workers are experiencing effective salary cuts.

NB: The above isn't necessarily a contradiction of the Great Speed-Up phenomenon i.e. companies pressuring their remaining permanently employed salaried workforce to do ever more with ever less. It just applies to different sub-groups of workers.

So - why do I think ZMP is just a funky name for an old story? Mostly because I agree with Garett Jones:

"Perhaps (...) the "ZMP" workers just lose half of their productivity due to, say, job-specific technological change (...)

In a sticky-price slump, there's less real demand for goods so output really is "demand-constrained." And if output can't be stored then low demand for output means that it's only valuable to have as many workers as you need to meet demand. People used to by 1000 burgers a day but now they're only buying 900? The restaurant manager knows how to produce 900 burgers and it's not by paying workers to just stand around. Especially when the machines and equipment to make the burgers are already sitting right there, it's obvious which input you'll cut back on: work hours. It takes fewer labor hours to make fewer burgers, end of story. Any extra labor hours are just, well, ZMP".


Said a bit differently: Technological change making workers irrelevant asides, ZMP workers theory is simply re-stating that, in times of crisis, when sales outlook is weak, companies aren't interested in employing more people, regardless of who they are (but more so if they are long term unemployed) and, especially damning for some schools of economic thinking, regardless of how low their asking salary.

On the other hand, I personally find this hardly surprising at all. After all, the same is true of capital investment. In times of crisis, when sales outlook is weak, companies aren't interested in investing into machinery and the fact that the cost of capital (interest rates) is low is irrelevant.

As I mentioned before, the sales outlook is the main driver of companies' behaviour and the rest is window dressing.