David R. Henderson  

Arnold's Clarification

PRINT
The Truck Driver Puzzle... The Folly of Fools...

I'm glad Arnold clarified his thinking in his latest post. He had written, as recently as two days ago:

But until the project manager comes up with a new plan, the other workers are all ZMP [capable of producing zero marginal product]. Think of the economy as being like that construction project, except that there is no project manager. There are only entrepreneurs acting in a decentralized fashion, guided by the price system. They don't get it all sorted out right away. Until they do, ZMP prevails.

To me, that sounded as if he was saying that they have zero marginal product.

But in Arnold's clarification today, he writes:

Reading David Henderson's criticism, at first I could not understand his problem. He says that at one time I suggested that it would take a 25 percent cut in wages for workers to be employed, but then more recently I implied it would take a 90 percent cut in wages.

Look, I have no idea how big a cut in pay it would take. My point is that it is large. It would be a lot smaller if workers were willing to accept jobs that are far from their long-term comparative advantage. Taking a job as a truck driver might not even mean a drop in pay for workers who have recently lost their jobs. But people want to find a long-term source of comparative advantage. That is difficult in a complex economy.


So it turns out that Arnold and I are not disagreeing at all. We both agree that there are productive jobs out there that many people currently unemployed could get: they would have substantially greater than zero marginal product and they would get a wage that reflects that. In short, we both agree that zero marginal product is not a good description of the current productive ability in actually existing job openings of many of the currently unemployed. For that reason, ZMP is a term that deserves to be consigned to the dustbin of history. I think it's time to think about the potentially huge role of, in many states, 99 weeks of unemployment insurance, in stretching out the labor market adjustment.

Incidentally, my 68-year-old cousin is an interesting example of the truck driver phenomenon that Arnold discusses in his latest post. He was selling health insurance in Phoenix and then saw ObamaCare coming. So in the summer of 2010, rather than wait a few years when he would be competing other unemployed health insurance salesmen, he looked into it and found that he could earn at least as much by training to be a long-distance big-rig driver. So that's what he's doing.


Comments and Sharing


CATEGORIES: Labor Market



COMMENTS (10 to date)
Tom West writes:

I think ZMP also has to have context as to what the 'Product' is. There are lots of people who are ZMP over tomorrow's product (e.g. R&D).

When companies are in distress, it's completely natural that they should be the first out the door, although it may harm the company's long term outlook.

Being in the computer field, I have to admit that I am ZMP in the short-term for almost any business. Infrastructure improvements will impact over years, not over weeks.

The term, however, can easily end up being equated with useless, so I agree it's not an ideal term.

Bryan Willman writes:

And are ZMP and PSST macro or micro? Are the effects of unemployment insurance magnified by demographics?

I have observed, and indeed fired, ZMP and even Negative Marginal Product people. And a large part of hiring is avoiding such people. But has the percentage of such people really risen 5% or so in the last 2 years?!?

Likewise, at a micro-local-finite-time basis, PSST is obviously right. Jo the carpenter can't find construction work any more, and will need to find something else, and that might be difficult, obstructed by various things, etc. Is that a macro issue? I don't know, I'd love to see a test of whether it is.

As for unemployment - are numbers at hand to test the demographic effects?

In the simple case - what precentage of the long term unemployed are likely to make it to some sort of retirement age (or close enough to span the gap) with currently available unemployment?

I have spoken to such people, but that's anecdote not data.

fundamentalist writes:
“Taking a job as a truck driver might not even mean a drop in pay for workers who have recently lost their jobs.”

There is no trucking company on the planet who will hire an inexperienced truck driver. I worked for a trucking company years ago. To get an entry level truck driving job you need to graduate from a truck driving school, which ain’t cheap. Until then, inexperienced truck drivers have zmp for any trucking company.

A few companies will train new truck drivers, but only on the condition that they think you are a long term employee. To be considered a long term employee you have to demonstrate in some way that your career change is permanent and you aren’t likely to leave after a year or two.

This morning my computer refused to work for almost two hours for various reasons. During those two hours I had zmp for my employer. ZMP is real for many workers in the real world. You can literally offer to pay an employer to work for them and you won’t get a job because the employer doesn’t have the capital equipment needed to make you useful, you don’t have anywhere near the education and experience to use that capital equipment, and the employer thinks it’s not worth his time to train you because you won’t stay long enough to recoup his investment.

Economists who loudly proclaim that workers merely need to reduce their desired income in order to get a job are doing nothing but advertising their complete ignorance of how the real world works.

David R. Henderson writes:

fundamentalist writes:
You can literally offer to pay an employer to work for them and you won’t get a job because the employer doesn’t have the capital equipment needed to make you useful, you don’t have anywhere near the education and experience to use that capital equipment, and the employer thinks it’s not worth his time to train you because you won’t stay long enough to recoup his investment.
Here’s my offer and my refutation: Anyone who offers to pay me so that he/she may work for me is hereby accepted. I have some research assistance to do that I have been delaying. If you offer me $2 an hour so that you may do it, I accept.

fundamentalist writes:
Here’s my offer and my refutation: Anyone who offers to pay me so that he/she may work for me is hereby accepted. I have some research assistance to do that I have been delaying. If you offer me $2 an hour so that you may do it, I accept.

Would you take the $2/hr from a brick layer? Do you think the bricklayer would provide you with value as a research assistant?

If you go into the HR office of any company and offer to pay them to give you a job, more than likely they will call security on you. If they don’t, they’ll have the following concerns:

1) Know one will assume that you will pay them to work for them forever. They’ll want to know how long you plan to pay them. They will assume you’re willing to pay them for the training they will provide, in which case they’ll ask you why you don’t pay a good school for the same training.

2) They’ll realize that at some point you’ll require a wage in order to stay, and then they will do all of the normal calculations about whether they can forecast sufficient growth to justify hiring you and paying your wages plus huge benefits. If the company is in an industry like housing or autos, they won’t see the growth to justify the position.

3) They’ll look at your background to see if you’re a good fit for the job and at that point you become like any other job applicant. But if you’re currently unemployed, you’re probably changing careers and don’t have the background they’re looking for.

3) They’ll still wonder about the mental stability of a person offering to pay for a job. And that entails the liability of hiring a mentally unstable person.

4) There is a strong bias toward local applicants, so if the job you want is in another state you’ll have a tough time getting an interview even offering to pay them to hire you because out-of-state recruits rarely stay long term. They get home sick and family pressure forces them to try to relocate back home.

5) Offering to pay for a job advertises your desperation and builds resistance. The company will wonder what you’re hiding that is so bad it keeps others from hiring you.

Applying for a job is more like dating than anything else. The target of your affection must have respect for you or they will lose interest. How many dates would you get if you offered to pay them to go out?

From the employer’s side, hiring an employee is more like getting married than any other type of experience. Again, how far will you get paying someone to marry you?

I have been laid off about six times in my working life and changed careers after one of those. Each time I found work in about three months. I have talked with a lot of honest HR experts in the process. Believe me, the hiring process is no where near like what economists describe it.

fundamentalist writes:

PS, I was referring to long term jobs/careers. If someone showed up and offered to pay me to mow my lawn, of course I would take them up on the offer. But if someone showed up and offered to pay me to do the job on which I depend for an income, I would think twice. I would need to know their background. I would have to consider how much training I would have to invest and the cost, about $50/hr. Would they be willing to pay that for the six months it would take me to train them?

Temporary work that is mostly manual labor has different requirements for a career.

fundamentalist writes:

I will go even farther: not only is ZMP prevalent, so is NMP, negative marginal product. In the real world, new employees can require years of OJT before they rise above ZMP for most companies. And that is with a degree in their field. Companies hire NMP employees because they think that in the long run they will earn a return great enough to repay the initial investment while the new employee was NMP.

Bryan Willman writes:

David -

Have you talked to your HR department? To your lawyer? To your state's workman's comp department? To your insurance agent?

If I offer to pay you $2 per hour to do RA work for you, but your HR department and workman's comp agency inform you you must pay costs of about $12 per hour, then what? OK, so that has discounted my Total Cost of Employment at Zero Wages from $12/hr to $10/hr, but if I'm a terrible RA my output might only be $9/hr.

I *won't* let you pay me $2/hr to mow my lawn, because I will be effectively compelled to buy liability insurance (to cover allowing crazy people to work for me) which will surely cost more than you will pay me.

What's more, while perhaps not tested, in WA *I would be compelled to pay workman's comp for you* and the $2/hr you pay me might not cover that bill.

Economic analysis of employment markets must consider the overt regulatory costs and various covert costs of employment. It is the Total Cost of Employment (TCE) that matters, not simply the wage rate.

ZMP or sticky wages are not about whether somebody's production is worth more than the clearing wage rate, they are about whether somebody's production is worth more than the TCE rate. (Yes, lowering the wage rate lowers TCE, but perhaps by not enough.)

Bryan Willman writes:

While we're at it...

In WA, as of 2010 or so, it is not possible to get a CDL without either showing experience or going to truck driving school.

Something like 1 calendar month and $4K minimum.

It is illegal to hire somebody without a CDL to drive a truck in commerce that weighs more than 26,000# (or meets any of another long list of rules.)

And, the tractor part of a semi costs about $125K, so whether you offer to pay me, or work for below standard wage rates, is actually secondary to the risk management and opportunity costs associated with that item of capital equipment. Doing things that make you seem insane won't help you get such a job.

David R. Henderson writes:

@Bryan Willman,
No, I haven’t talked to my HR department, BECAUSE I DON’T HAVE ONE. My HR department is me. My offer stands. Anyone who wishes to pay me $2 an hour so he/she can do research assistance for me is someone I wish to “hire.”
And, by the way, I’m not offering to mow your lawn.

Comments for this entry have been closed
Return to top