Arnold Kling  

Response to Bryan on ZMP

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His post is here. I would say that there is a decent probability that he is correct. However, below are some potential counter-arguments. I will also address Don Boudreaux.

On the point that past forecasts of technological unemployment have been wrong, I agree. If history is any guide, then eventually a new economy will emerge in which pretty much every worker is much more productive than before. On the other hand, Moore's Law might produce technological change that is much faster than what we have experienced in the past. For humans to keep up, we may need brain implants or other technological enhancements.

The point that low-skilled workers were doing better a few years ago is not totally compelling. They were productive in the context of an unsustainable housing boom. One way to read the last ten years is that the exceptional years were 2005 and 2006, not 2008 to the present. The basic trend is accelerating substitution of capital for labor, a process somewhat masked by the bubble.

The point that third-world workers are employed refutes the Z in "zero marginal product." I would agree that American workers could compete for jobs at third-world wages. But it still could be that marginal product is well below first-world wages.

I have discussed the issue of Where are the Servants? already.

Finally, Bryan suggests that because wages have not fallen, then the marginal product of workers need not have fallen very far. But if the marginal product of workers has not dropped, then it is hard to explain why so many jobs have been eliminated. Average productivity has been growing quite well, while average real wages have flat-lined. If this were true on the margin, then labor demand should have increased. Instead, as Tyler Cowen puts it (see the video of the year), it looks as though firms are raising average productivity by replacing/shedding workers. And shedding workers only raises average productivity if marginal product is significantly lower than average productivity.

Turning to Don's post, he writes,


Even the lowest-skilled worker is capable of producing something of value. And the value of using that low-skilled worker to produce that something, rather than using some other means (i.e., a higher-skilled worker or a machine) to produce that something, rises the greater is the comparative advantage of those other means at producing something else.

That's easy for an economist to say. In the real world, try to figure out what that something is. That is what I mean by finding PSST. If these patterns could be discovered instantly, then there would be no unemployment. However, in a complex world, it is difficult. As it gets more complex, it becomes more difficult (other factors, such as better communication technology, may work in the direction of making it less difficult). One hundred years ago, if you did not know what else to do, you could offer your labor to a farmer. Today, the farmer can not find anything that you can do that is worth a subsistence wage.

Imagine a construction project where the project manager has just discovered a major problem with the plans. The design needs to be reconfigured, and workers need to be redeployed. But until the project manager comes up with a new plan, the other workers are all ZMP. 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.


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COMMENTS (8 to date)
david writes:

If finding PSST is the binding constraint across the business cycle, why are activities associated with PSST - e.g., founding of small businesses - procyclical?

William Bruce writes:

"Today, the farmer can not find anything that you can do that is worth a subsistence wage."

How can an assertion of this nature even be established? (It seems wholly untrue to my intuition, which has been formed by living in a rural area and even being a farm hand.) More importantly, why are subsistence wages even relevant in a world of minimum wages and reservation wages set by unemployment benefits, welfare, informal mutual-aid relationships, etc.? The rhetorical use of subsistence wages as a *limit* is understandable, but that seems to obscure a variety of other factors.

Incidentally, are the asserted ZMP effects going to be the cure for Baumol's cost disease?

Arnold Kling writes:

David,
I think of finding PSST as like the parts of a puzzle clicking together. Near a trough, it is hard to find parts that fit. Near a peak, it is easy to find parts that fit. Hence, near a peak you see more small businesses successfully launched.

Becky Hargrove writes:

Imagine the former construction worker is no longer needed, as now housing comes in pre-fabricated pieces that even one's grandparents could put together. To be sure, the construction worker is out of a job, and so appears to be in an economic environment which looks like 'a dog chasing its own tail'. However, the former construction worker now has options in a new economic environment, one which gives him more choice as to work because of the lower price of housing. Plus, other factories, seeing the decreased financial needs of the worker (due to cheaper housing) are more inclined to return. If only it were this easy for healthcare, the arguments are a bit more complex.

jseliger writes:

"One hundred years ago, if you did not know what else to do, you could offer your labor to a farmer. Today, the farmer can not find anything that you can do that is worth a subsistence wage."

Also, many Americans cannot or will not work on farms, as that farmer's experiment shows; I hadn't really thought about how hard farm work is until I saw this.

Mark V Anderson writes:

"Imagine a construction project where the project manager has just discovered a major problem with the plans. The design needs to be reconfigured, and workers need to be redeployed. But until the project manager comes up with a new plan, the other workers are all ZMP. "

Yes, but this is all short term. If you think of ZMP as a short term measure, then sure, pretty much all unemployed workers have a ZMP because they haven't found a productive use for their talents. How does that make this recession different from any other?

When you speak of PSST, it sounds like you just mean that labor classifications are sticky, so it takes some time for laborers to change what they do for a living, and also industries are sticky, in that it takes a while for non-profitable industries to be replaced by profitable ones. In other words, it will take some time for our economy to get back into equilibrium, with close to full employment. If that is what you are arguing, then I don't think you'll get a lot of argument.

But if you are arguing that PSST is a permanent condition, then I think you are way off base. There are still lots of relatively low skill jobs that would be demanded if the price was right. You may be right that personal servants wouldn't fill the bill. But that doesn't mean personal service workers that work for several people would not be in demand. Workers that provide services such as housework, massage, sex, laundry, cooking, or even conversation may someday be an important part of our economy. These services would be even more valuable if the workers come to our house to do the work, which is part of the lowered price. Such services currently have taints to them, for both the supplier and the consumer, but eventually they will become much more common. That's what coming to an equilibrium is all about.

Another increase coming is in entertainment. Even now, we have constantly more exotic sports and entertainment shows, and that will increase dramatically in coming years. The skills required for them will drop dramatically.

Not that I agree that the ordinary unskilled jobs we have now have dropped so dramatically. We still need lots of store clerks, gofers, lawn workers, etc., and will for some time. The other type of work I discussed above will not be needed in great quantities for decades to come. Our current recession is a temporary thing, and will work itself out without dramatic changes needed. But it will take a few years.

Daublin writes:

Regarding finding productive work, Arnold writes:

"That's easy for an economist to say. In the real world, try to figure out what that something is."


It's also easy for someone to say who's career path was: go to school, go to more school, apply to work inside a school, work in a school.

I know a number of people who used to work in construction and have had a hell of a time figuring out what to even try for next. Likewise for people in journalism. I personally made a major career change a few years ago, and it was similarly weird.

It's not the people I'm talking about are trying and failing at anything specific. It's weirder than that. You don't even know what to try for.

Peter writes:

If average productivity is measured by real GDP, then that's pretty useless. If a company fires someone from support and therefor lowers the quality of their service, it wont show up in higher inflation and hence wont show up in lower RGDP.

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