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Tyler Cowen comments, drawing a response from Bryan.


I just don't think that the fraction of the healthy adult population with ZMP has risen much since the last time unemployment was 5%.

Here is where the term sustainable in patterns of sustainable specialization and trade comes in. Suppose that the last time we had 5% unemployment and PSST was fifteen years ago. Since then, we have had periods of 5% unemployment, but they have coincided with unsustainable bubbles.

It is indeed implausible that a large number of workers have become ZMP in just the past three years. But it is somewhat more plausible that over the past fifteen years the Internet has made a lot of workers ZMP. At least if you do not insist that they have exactly zero marginal product, but you merely take ZMP to mean "too little value to be worth the expense of hiring and the cost of supervising."

As an aside, I would say that critics of ZMP should be trying to respond to the Garett Jones and Daniel M. Rothschild work showing that many of the workers hired under the stimulus were already employed previously. If the unemployed are not ZMP, then one would expect to find the recipients of stimulus money fishing in that pool rather than in the pool of people who already have jobs.

UPDATE: See this post from 2010 on the ZMP issue.


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COMMENTS (11 to date)
Alex Godofsky writes:

"The expense of hiring" is an implicit concession to sticky wages.

Thomas Boyle writes:

In all the discussion of unemployment, ZMP, sticky wages, etc., I haven't seen any discussion of the path-dependence of lifetime income.

If someone is laid off from a (reasonably) high-paying (specialized) career, they may be better off to stay unemployed for as long as it takes to get back on that career track, even if a few rungs down from where they were. Taking a much-lower-paid job or, worse, a much-lower-paid job in another industry, almost guarantees they will never return to their old career - not even a few rungs down. They will be "out of the game" and their new much-lower pay rate will be the basis for future employers deciding where they "fit" in the scheme of things.

The result is that the present value of their lifetime income may be much higher, if they stick to their guns and stay unemployed, than if they take another job to get through the downturn. This may be true even accepting some probability that they may NEVER get back into their old career path, at ANY level; the expected value of holding out for a return to their old career may be high enough to justify protracted unemployment before giving up.

Anyone have thoughts on this?

Glen W Smith writes:

Thomas,

Fits with my experience and observations going back to the 1970s.

Nathan Smith writes:

re: "if you merely take ZMP to mean 'too little value to be worth the expense of hiring and the cost of supervising.'"

This works great as a defense of ZMP against its critics, but it also suggests that theory should deal directly with "the expense of hiring and the cost of supervising," if this is such an important part of the explanation for unemployment. In this connection, I think there could be interesting research done on the issue of discrimination against the unemployed. To me, this suggests a different reason why firms poach employees from one another rather than hiring the (long term) unemployed: it drastically raises the match quality of a particular resume. (That's my theory of the phenomenon anyway.) Suppose you post a job that's available to everyone. And suppose you get two kinds of applicants: (a) employed, and (b) unemployed. Employed people will only apply if the quality of the match of their skills with the job characteristics is better than their current employer plus the costs of switching; that is, the match will have to be pretty good to get them to do it. For the unemployed, the cost of applying is a lot lower since their time is less scarce, and they're willing to matches of far lower quality. In short, resumes from the employed will be far better than those from the unemployed. For the latter, 90% of the resumes will waste your time. What this implies for your theory is that the costs of hiring are endogenous and rise sharply in recessions because any job posting is swamped with unsuitable applications.

Incidentally, the problem might be fixed by technology, if some smart new tech start-up came up with a new super-quick way for bosses to search resumes, and maybe also to drastically reduce the paperwork involved in hiring people for short-term contacts. I'd like to start that company if I could find smart people to work with on it. Entrepreneurial and/or software-developer types, feel free to send me an e-mail.

Thomas DeMeo writes:

It may be more plausible to consider that the number of ZMP workers has been growing for some time, but that firms have become much more likely to let them go in the last 3 years.

Jody writes:

but you merely take ZMP to mean "too little value to be worth the expense of hiring and the cost of supervising."

To capture this thought, I suggest using Zero Marginal Profit instead of Zero Marginal Product

Bryan Willman writes:

"ZMP" will always be related to TCE - total cost of employment.

It would be possible for people to become "not worth hiring" without a change in nominal wages, or indeed without stickyness, if overt and covert regulatory, capital, etc. costs of employing someone go up enough to make the job unprofitable to fill. Even if the market wage has cleared to $0/hr, but the TCE rate is $10/hr, and the value of the output is $9/hr, noone will be hired to do that task.

Steve Roth writes:

"Since then, we have had periods of 5% unemployment, but they have coincided with unsustainable bubbles.

...it is somewhat more plausible that over the past fifteen years the Internet has made a lot of workers ZMP."

And -- per your recent AD post -- debt deflation (your bubbles ending) and the resultant decline in demand has uncovered that reality, forcing employers to stop hoarding labor and let people go.

Are PSST and AD decline really mutually exclusive explanations? Seem more complementary to me.

And both may need to be fixed to find our way out of this.

fundamentalist writes:

I don’t understand why ZMP is so hard to accept. What MP does a brick layer have for a company that needs diesel mechanics? ZMP! Obviously. And even if he hires a recent grad of a mechanic school, that grad’s MP will be negative until he is trained for the type of work the company needs.

The confusion about ZMP comes from the fact that mainstream economists want to make labor a homogenous glob and the demand for it unspecific. In other words, they assume that the market for labor is perfectly competitive. It ain’t! Never was and never will be. Only in the fiction of a perfectly competitive market is price the only thing that matters.

All workers are not substitutes for all other workers. Companies don’t hire just any worker for any position if the price is right.

fundamentalist writes:

PS, workers can have high levels of MP while employed and have that drop to ZMP when the industry in which he works tanks. That happened to carpenters and auto factory workers in the latest crisis. Those workers would have high MP in their industry, but have ZMP in any other industry.

Bruce writes:

Am I correct to assume that PSST and ZMP aren't mutally exclusive. Can't workers have zero product where they are, but through recalculation may often find place where they have a positive product?

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