Arnold Kling  

The ZMP Hypothesis

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Tyler Cowen writes,

In general, which hypotheses predict lots more short-term unemployment among the less educated, but among the long-term unemployed, a disproportionately high degree of older, more educated people? This stylized fact seems to point toward search and recalculation ideas, with some zero marginal products tossed in. Do aggregate demand theories yield that same data-matching prediction? I don't see it, at least not without being paired with a theory of concomitant real shocks.

Some remarks:

1. I would say to be careful about what the "stylized facts" are these days. A lot of people have left the labor force, and that could skew things. A younger educated worker might leave the labor force to go to law school, rather than show up as long-term unemployed. The older educated worker faces different options.

2. Let us talk about the marginal product of worker i in occupation j. In most cases, this is indeed zero. My marginal product would be zero in fishing, medicine, and many other fields. In a complex economy, if you were to randomly assign workers to jobs, ZMP would be the norm, not the exception. The more complex the economy, the more carefully workers must be assigned in order to avoid ZMP.

3. When a manufacturer has excess inventory, production workers have effectively ZMP. But for the economy as a whole, that is consistent with an aggregate demand story.

In the 1930's, many agricultural workers became ZMP. This was due to a long-term trend of productivity rising faster than demand, a trend accelerated by the internal combustion engine, which reduced the amount of land under cultivation (with better transportation, you could grow the food where the land was best, even if it was far from cities). These ZMP workers came to cities, where they collided with other ZMP workers, as many manufacturers had excess inventories.

However, back when half the labor force (or more) was doing manual labor, if one worker was hired, the demand for goods and services from that worker's income served to increase the marginal product of workers elsewhere in the economy. The multiplier worked.

What I think Tyler Cowen means by ZMP is that even when demand at a firm whose workers are in occupation j is high, it does not need to hire additional occupation-j workers. The multiplier does not necessarily work.

4. The Garett Jones worker has a marginal product that is very subjective and lumpy. When you see expansions opportunities, you hire people to try to exploit them. When you see threats to the survival of your business, the short-term ZMP of such workers suddenly stares you in the face.

5. Older workers may suffer from a human capital vintage problem. Their education and experience may have become obsolete rather suddenly, because of globalization and technological change.

One way to summarize all this is that the capitalist calculation problem is to assign workers to jobs. Unless this is done correctly, ZMP results. A number of trends have made it harder to do this assignment correctly.

All that said, I am still optimistic that when employment starts to pick up, it will pick up very rapidly. The herd of employers who were motivated by contractionary fear will turn into a herd of employers motivated by expansionary greed.

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COMMENTS (4 to date)
Rebecca Burlingame writes:

Total aggregate demand can actually be a somewhat rigid point, determined by what efficiency maintains is possible, through money. In other words, the product being offered in the marketplace is predicated upon the exact dimensions of what is deemed possible, to offer as a product in the first place (the result of regulation and law). This in turn affects the aggregate demand to only exist for a product defined specifically upon one parameter. You say that your value in the world of health care is zero, what have you actually learned in your lifetime that is useful to someone in an alternative universe of aggregate demand? There is another type of aggregate demand not actually being measured that could exist for human skills in general, which lies not along the rigid parameter of the certain level required for monetary compensation (the best of the best) but similarities of skills within infinite sets of parameters.

matt mcknight writes:

Given that we are not in a traditional manufacturing economy any more, your #3 point is interesting. How do you factor in things like software and digital downloads from Apple or Amazon, where additional units can be sold without additional production, distribution, or marketing costs, into marginal productivity calculations? Adding in that many of the over 200k products on the Apple App store are free, how much productivity went into creating (and using?) those? I wonder how the much the availability of marginally free things, like this blog, is tempering the demand for paid things, like a book with similar information.

Chris T writes:

How likely is it that the massive rise in employment in the service and construction sectors were the last spasms of the industrial age model of labor?

Free Spirit writes:

Perhaps it is not Zero Marginal Product, but Marginal Product

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