2011 January 16 Sunday
Zero Marginal Product Workers A Growing Problem?

Tyler Cowen responds to Paul Krugman and Scott Sumner on whether the zero marginal product worker problem is growing. In other words, how many people have productivity which is so low that they are not worth hiring? Is that fraction of the total labor force growing? Tyler thinks it might be. Some other economists are skeptical. I'm in the "of course it is happening" camp.

4. For another take on #3, during the job-destroying periods of 2009, per hour labor productivity growth is rising at astonishing rates, try 3.4, 8.4, 7, and 6 percent, each quarter, annualized.  That's not just the regular accretion of technological progress (though some of it may be), it is an artifact from dumping lower quality and zero MP workers.  If I look in the second quarter and see labor hours go down 7.9 percent and see per hour productivity rise 8.4 percent, well, that's no proof but I sure go hmm....

5. I would not take it for granted that "normal" productivity growth continues in times of shock and crisis.  Maybe yes, maybe no. Scott's talk of the "trend rate" is assuming that the growth and cyclical components are separable and that is begging part of the question.

6. The zero MP hypothesis helps explain why unemployment is so much more severe among the less educated and the lower earners.  In contrast, Krugman writes: "As Mike Konczal points out, basically everyone’s unemployment rate has doubled, no matter their education level or location."  In reality, that kind of multiplicative relationship is very much consistent with joint AS-AD determination, including a zero MP for many workers in the equilibrium.  I'll write an entire blog post on that question soon, and then we'll see that this result actually discriminates against pure AD theories or is at best a neutral pointer.

One of the reasons I think this problem is real is a trend toward companies where the ratio of smarter to dumber workers is very high. The classical big industrial companies which reached their apex in the middle of the 20th century (e.g. General Motors and the other manufacturers) had a small fraction of smart people working as engineers and managers and a much larger work force doing fairly simple tasks which did not require great intellectual skills. Some of the assembly line workers no doubt were smart back before college education was rare. But the jobs did not require much intellectual ability.

Smart people innovated and employed large numbers of less intelligent people to produce what they developed. That's increasingly not how the world works any longer. The ratio of factory workers to engineers (and software developers) has plummeted as the number of factory workers plummeted and the number of engineering workers soared. Michael Mandel recently pointed out that computer software engineer employment in the US has already surpassed the pre-downturn levels of 2007 and 2008. In Silicon Valley the social media companies are bidding up developer salaries.

Unemployment among lower earning workers is extremely high. Tyler on ZMP workers back in July 2010:

There is another striking fact about the recession, namely that unemployment is quite low for highly educated workers but about sixteen percent for the less educated workers with no high school degree.  (When it comes to income groups, the lowest decile has an unemployment rate of over thirty percent, while it is three percent for the highest decile; I'm not sure of the time horizon for that income measure.)  This is consistent with the zero marginal product hypothesis, and yet few analysts ask whether their preferred explanation for unemployment addresses this pattern.

Philip Greenspun points out that office work has become more intellectually demanding and the costs of mistakes have risen.

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.

Arnold Kling points out that in previous recessions output used to fall less than employment as corporations wanted to retain people to use after recessions ended. But not any more.

Until the most recent recessions, the tendency was for output to fluctuate more than employment. Thus, if you drew a trend line for productivity growth, productivity growth would be below trend during recessions and above trend during booms. The more recent recessions, particularly in 2001 and in 2007-2009, have not followed this pattern.

Nick Rowe points out Spain and Ireland also have experienced rising productivity during the latest recession. Nick speculates this is due to lay-offs of construction workers who have fairly low productivity. But the US also experienced rising productivity in 2001. That was a result of the dot com bubble bursting.

Also see my previous post The Rise Of Zero Marginal Product Workers.

Share |      By Randall Parker at 2011 January 16 10:18 PM  Economics Labor

Luke Lea said at January 16, 2011 10:32 PM:

A decrease in the standard work week, ssy to 30 from 40, with time and a half for overtime would help mitigate that problem I believe.

A.Prole said at January 17, 2011 1:21 AM:

Yes.And for some strange reason the politicians keep on importing low IQ hispanics by the milion.

Engineer-Poet said at January 17, 2011 3:59 AM:

Of course.  Pols don't benefit from productivity, they benefit from having loyal client groups.

Mike said at January 17, 2011 11:55 AM:

"Smart people innovated and employed large numbers of less intelligent people to produce what they developed".

This is stil going on a lot, but the production and assembly jobs have moved to low wage countries, hence there is no point importing unskilled workers who aren't going to be able to add wealth to the economy.

Provided immigration of low skilled immigrants is stopped, there should at least be an increase in low skilled jobs in positions that are physically demanding, as the population is aging and those over 50 can't do physically demanding jobs.

Most countries now only import skilled workers, although quite a lot of unskilled workers still get in through family reunification and political asylum/refugee schemes. I can only think the Republicans haven't stopped unskilled immigration because of concern over the Hispanic vote or business lobbying.

not anon or anonymous said at January 17, 2011 3:37 PM:

It's the overhead costs. Minimum wage, Davis–Bacon (yum, bacon), union work rules, EEOC, diversity quotas, Obamacare etc. etc. etc. The hidden overhead and downside risks associated with hiring have been creeping upwards for several decades now. Why should we be surprised when marginally employable workers can no longer pull enough weight to justify a paycheck?

Mind you, this is scary stuff. It means European levels of structural unemployment for the foreseeable future, which will presumably lead to renewed efforts by liberals to pile on even more taxes and regulatory burden on employers.

Add skyrocketing deficits in the Federal Government and many US states, and you will realize what's happening: the New Deal/Great Society project has turned into an Olsonian nightmare, and its inner contradictions are coming home to roost. Sit back and enjoy the show.

tacticalchrstn said at January 17, 2011 3:54 PM:

So economists are just figuring out that zero or negative marginal product workers might be a problem? Profit is maximized when marginal revenue equals marginal cost so we need to look at the marginal cost of each additional worker and not just the change in revenue or product output when a worker is added to the rolls. FICA is 15.3% and then add FUTA paid to the state plus workers comp insurance, liability cost, etc. Government policy has been anti-labor for forty years while pretending to be pro-labor. If I wanted to devise policies that reduce the number of quality jobs I'd be hard pressed to do more to stamp out employment than has already been done. The downsizing movement of the early 90's is repeating itself. The idea behind downsizing was that you could lay people off and cut production and raise profit. It worked because costs fell more than revenues did. Hey Randall---when you read this did you immediately think the same two words I did? (welll duh)?
The fact that we just had a two percent reduction in FICA is a sure sign that our elites are getting scared. That little cut is the first smart thing our govt. has done about employment in years.

Mike M said at January 17, 2011 7:05 PM:

RE Luke's comments: The problem is that our lower tier of workers are inept. Their basic skills, e.g. reading and simple problem solving, are lacking (due to our failed public schools). Employers hesitate to hire them because they are NOT worth the minimum wage required by law. Therefore, time and a half far exceeds their worth. A better solution is to allow the market (not the government) to set the wage for these workers, i.e. eliminate the minimum wage, so that these functional retards can be hired at a wage that is justified for what they can produce.

RE Mr. Prole: Importing hispanics (of any IQ) is not the problem. The problem lies in giving "entitlements" to anyone (including US citizens) which serve as an incentive to NOT work. Under a "no work, no eat" system, people have an incentive to work....and low IQ foreigners have little or no incentive to jump the fence and compete with more able workers.

RE Engineer: I agree. The cycle of pols paying off SIGs with entitlements in return for votes that keep the pols in their positions of power (and kickbacks) is the big problem. If this cannot be solved, our country - as we know it - is doomed.

gcochran said at January 17, 2011 8:56 PM:

'Our failed public schools' = nonsense. Added value, which is to say measured achievement after taking student characteristics into account, is pretty much the same for public and private schools. It's also essentially the same for schools now vs schools in the past, or for schools here vs schools in Europe.

The public is somewhat dumber than it used to be, partly because of within-group dysgenic trends but mostly because of between-group demographic changes.

And just in case anyone is listening, big changes in marginal taxes, big differences in regulatory burden, etc are not the main influences on economic growth. The top income tax rate was > 70% in the1960s, which had a higher rate of economic growth than any decade since. I will give a metaphorical see-gar to anyone who points out any of the main influences.

not anon or anonymous said at January 18, 2011 9:30 AM:

"The top income tax rate was > 70% in the1960s, which had a higher rate of economic growth than any decade since. I will give a metaphorical see-gar to anyone who points out any of the main influences."

A few points:

1. The post-WWII period saw rapid growth almost everywhere, from Mexico to Brazil to the US to the Soviet Union to Romania to Italy to Greece. It doesn't tell us much about whether the economic model was actually very efficient.

2. The US economy actually improved after the Dems cut the top rate from 90% to 70% in 1964.

3. Most people did not face high marginal tax rates during the post war years, only a tiny few.

4. The very rich had all sorts of loopholes, such as 60% exclusion of capital gains.

So it wasn't a good system, but it did limited damage, and the economy did improve after rates were cut far below 90%. And those were fast growth years for economies (Russia) that no one now would want to emulate. It was also rather pointless, as it collected little revenue.

Mike said at January 18, 2011 8:49 PM:

"Under a "no work, no eat" system, people have an incentive to work....and low IQ foreigners have little or no incentive to jump the fence and compete with more able workers."

A zero welfare system is a political impossiblity, and in any case most immigrants don't come for welfare (that's just the icy on the cake) they come because the wages are higher or the jobs more numerous than in their own country. There is no clear empirical evidence that countries with less generous welfare systems have lower immigration levels than countries with more generous welfare systems. Successful economies with tight labour markets will always attract immigrants whatever their welfare policies are, although tight welfare policies may be useful in other respects.

Another thing is that different groups will monopolise different sections of the labour market and discourage random competitors. If Mexicans for example dominate the local market for unskilled construction labourers then a random Black or White guy who shows up will probably struggle to get in even if he is keen and willing, and he probably won't be able to understand what he's supposed to be doing as his co-workers won't be speaking English.

Mthson said at January 18, 2011 9:39 PM:

Re: gcochran on the main influences

Would you say high IQ + low corruption/high trust?

Thus Scandinavia is wealthy even though they're socialists, and Russia and Ukraine are poor, even though they're high IQ.

It'd be interesting to hear your thoughts on the subject.

Re: Mike
Right, according to the NYT, Mexican immigrants on average receive a 500% higher income than they would receive in Mexico. (Source: http://www.nytimes.com/2010/12/26/business/26excerpt.html )

Richard Weare said at January 25, 2011 9:34 PM:

Hello my name is Richard Weare and I live in Calgary, Alberta in Canada and I am a total idiot and moron as I only have an IQ of 75. I am such an idiot and moron that if someone asks me the directions to go somewhere, I have to tell them that I don't know as I am to stupid to remember anything and that is due to my low IQ of 75.

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