Arnold Kling  

AS vs. PSST, again

PRINT
Denmark... Why Is Employment Becoming a L...

The debate is hotting up, as our friends across the pond would say. Some random comments.

1. The Washington Post reports that some on the left want to see older workers encouraged to retire, to make room for young workers. If you believe in AS-AD, I suppose that makes sense. If you believe in PSST (or anything like elementary economics), it's nuts. From a PSST point of view, taking away market activity from some people will reduce, not increase, the market economic activity of others. I should point out that this applies to sending home illegal immigrants--from a PSST point of view I would expect this to reduce employment of the native population, not increase it.

2. Nick Rowe talks about the effect of technological improvement on labor demand. However, he uses a single production function. That either means he will tell a partial equilibrium story or that he will tell a GDP factory story.

3. Scott Sumner responds to my response.


The trend rate of growth is around 2.5% to 3%, and you'd expect no change in the unemployment rate if growth is at trend. Our growth may have been a tad above trend (it's hard to know for sure) but it's also true that unemployment has fallen slightly since the 10.1% peak in 2009. No significant mystery to be solved, although I acknowledge that each recession is slightly different in terms of Okun's Law, Beveridge curves, etc.

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.

4. Tyler Cowen has much more. One point he makes is that "trend productivity growth" is not some deux ex machina operating outside the business cycle.

5. I want to reiterate that I would like to see the Fed behave as if this were an AD-caused recession. However, we should be prepared for the possibility that it is not, in which case expansionary policies will cause price bubbles in some sectors without doing much for employment and output.

6. I do not see ZMP as a characteristic that inheres in a worker. You don't have a "Z" stamped on your forehead. I see ZMP as characteristic of many modern jobs--the Garett Jones jobs of building organizational capital. Another point is that the critical value of marginal product does not have to be at zero. "Z" can mean "not enough to cover health insurance, office space, training costs, etc., and still exceed after-tax opportunity costs."


Comments and Sharing





COMMENTS (13 to date)
Steve writes:

Arnold - we (lay persons) love you dearly, but please remember to provide us with definitions for your acronyms (or at least links). And while many of us have advanced graduate degrees, they are just not in economics, we are still your students.

thanks

volatility bounded writes:

Kling, you are a bit loose in using the term "zero marginal productivity" to refer unemployed workers. A lot of businesses have taken the approach of advertising for jobs on the most specific basis possible, wanting someone with the exact skills, experience level, etc that they want, and not wanting to put any money or time into training -- even if it would be to their benefit.

The issue is not necessarily that the firms have actually tried to figure if the training costs are worthwhile, they've just decided against it due to inertia, fashion, laziness, and such.

Charlie Deist writes:

I saw Edward Prescott present an old(ish) paper at the AEA conference last week, and he seemed to be telling a similar story, but of a boom in organizational capital in the 1990s. In the Garett Jones economy, when was OC primarily being built, and when was it finished?

I haven't had time to sink my teeth into the paper yet, but this is from the first couple pages:

"In this paper, we extend the base model by introducing intangible investment and non-neutral technology change with respect to producing intangible investment goods and find that, in light of this new theory, the 1990s are not puzzling. Intangible investment is excluded from GDP because it is difficult to measure. Examples include research and development (R&D), advertising, and investments in building organizations. Some intangible investment is financed by owners of capital and is expensed rather than capitalized. Some intangible investment is financed by workers who are paid less than their marginal value product and receive some equity in their firm, which we refer to as sweat equity. These investments are made with the expectation of realizing future profits or capital gains when
the business goes public or is sold." --Ed Prescott, 2009, http://www.minneapolisfed.org/research/SR/SR369.pdf

Lord writes:

The thing about retirement is activity in the form of consumption is maintained even as the openings are made for new workers. Most do reduce spending when retiring though which would counter some of this. Overall it would be more a redistribution of work than increase in demand.

I think Tyler is quite wrong on that point and productivity does continue to rise regardless of the economy. It is why the very long term growth rate is so very constant. I agree this is a matter of the work, not the worker. How many more homes do we need in Vegas?

Bob Murphy writes:

Your point (6) is key, Arnold. I am getting frustrated that everybody keeps saying "zero" marginal product to explain unemployment. Who would work for $1 per hour?

Nick Rowe writes:

Arnold: my post was about macro. Definitely not partial equilibrium. It's a GDP factory story.

Salem writes:
I think Tyler is quite wrong on that point and productivity does continue to rise regardless of the economy.
Really? Rising worker productivity is independent of capital investment by employers? Surely not. Capital investment by employers is independent of the business cycle? Definitely not.
Nick Rowe writes:

Arnold:

The post of mine you link to wasn't really intended to be part of this debate. I was really on another topic. Stuff like the Lump of Labour fallacy.

But this other post of mine is directly relevant to this debate: http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/01/spain-is-even-more-exceptional-than-the-us.html
Short version: it wasn't just the US. Spain had an even bigger increase in productivity during the recession. Ireland broke Okun's Law too.

Totally off-topic: you are a very good economics blogger by the way, even when I think you are totally wrong. Been meaning to say that for some time. Might as well say it now, while I think of it.

Slocum writes:

...her point is that the critical value of marginal product does not have to be at zero. "Z" can mean "not enough to cover health insurance, office space, training costs, etc., and still exceed after-tax opportunity costs."

And the fixed costs of employing a worker have increased and seem likely to go up further. So "Z" may not mean zero today but rather zero looking forward. If a prospective worker's marginal productivity (after employment costs) is positive now, but does not seem likely to remain so, do you still hire that worker?

CBBB writes:

#6 is a VERY important point. There are many jobs that do not contribute to GDP or whose contributions are very hard to measure.

Also note that in a recession it's more common for an employer to close down a whole department, project, factory rather then go through the roaster of workers are fire the least productive ones.
The workers may have been skilled but the overall project they were employed on wasn't productive.

Lawrence J. Kramer writes:

I don't quite see what being "on the left" has to do with this. Does being for early retirement incentives put one on the left, or does being on the left lead one to advocate it?

Socialists advocate early retirement because they think the workers deserve it. They're wrong. But rightists tend to think that debunking a bad argument is the same thing as debunking the proposal is badly supports. They're wrong, too.

The reason we need to make room for younger workers is that doing so best distributes the benefits of cheap foreign labor. Working shorter careers and fielding fewer workers per household are ways in which a society can benefit from its comparative advantage in capital intense production.

Unlike the socialists, we can still that employed workers work hard and that successful capitalisists get rich, but we can do it in a way that spreads the rare resource of employment in a socially stable way. (Again that issues isn't who deserves what - it's what preserves domestic tranquility and, thereby, secures the blessings of liberty to us and our posterity.)

I am amused when some pundit or other spouts off about "basic economics" without defining the boundaries of the economy to which those rules apply. The "economy" these days is global. All the old rules apply, but none of the effects can be assumed to be local. Automation creates opportunity for workers somewhere in "the economy." Trade creates wealth for the trading parties, which become economic activity, somewhere in "the economy." All of Bastiat's observations hold: money we save by not breaking our own windows to create jobs for glaziers is spent to create jobs elsewhere "in the economy."

If all those somewheres and elsewheres are outside the United States, no principle of "basic economics is violated." Indeed, the principles of comparative advantage (in labor-intensive vs. capital-intensive production) operate with a vengeance to send the jobs overseas and the capital to the increasingly automated US of A. That we will need fewer workers thus seems to me a matter of, well, basic economics.

Lord writes:

Yes, really. Work is doing things and the way of doing things improves even without increased capital. Some 90% of productivity growth is independent of capital intensity. Capital counts, just not for much because human capital is so much more important.

Salem writes:
Yes, really. Work is doing things and the way of doing things improves even without increased capital. Some 90% of productivity growth is independent of capital intensity. Capital counts, just not for much because human capital is so much more important.
It's nothing to do with capital intensity, it is about continuing capital investment. In real terms, computers today are probably not that much more expensive than typewriters a century ago, so you can say ah, we have not got more capital intensive, but that doesn't mean that productivity is independent of investment. A company still using 19th century tech would lose WAY more than 10% of productivity.

And technological improvements are themselves a function of the business cycle.

In downturns, firms put off making capital investments and allow their systems to depreciate. In upturns, firms make capital investments, but because technology is always becoming cheaper that means firms do not necessarily become more capital intensive over time. "Ways of doing things" do not improve by magic.

Comments for this entry have been closed
Return to top