Bryan Caplan  

The Reasons for My Hostility to ZMP

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My brilliant former student Eli Dourado wonders why I'm so hostile to the Zero Marginal Productivity (ZMP) theory of high unemployment:
It is hard to think of another idea that is more Caplanian. This is after all the man who pointed out that "the lower deciles don't contribute that much to the economy, anyway." ...

The ultimate revenge of the nerds is developing tools that make jocks literally useless...

ZMP coheres well with my elitism,  but coheres poorly with my rejection of high-IQ misanthropy.  The lower deciles contribute little to the economy in percentage terms, but the absolute value of their contribution is still hundreds of billions of dollars. 

In any case, when I judge specific hypotheses, I try not to put too much weight on coherence with my overall worldview.  The best reasons to reject ZMP are:

1. Non-economists have been falsely predicting the technological obsolescence of human labor for centuries.  Economists have been correcting them for about as long.  Clearly ZMP's psychological appeal far exceeds its true relevance.  This creates a very high burden of proof for anyone who claims that the ZMP nightmare is finally a reality.

2. Low-skilled Americans clearly didn't have ZMP a few years ago.  Indeed, their marginal product remained enormous by world and historic standards.  How could their productivity have changed so much so quickly?* 

In his post, Eli points to precisely one factor that did change quickly in recent years: the "cyclical fall in aggregate demand."  But if that's the key shock, ZMP is just a misleading redescription of Keynesianism.  Isn't the whole point of ZMP supposed to be that boosting aggregate demand won't reduce unemployment nearly as much as Keynesians think?

3. Eli also mentions "nonconvexities," especially the "fixed costs of employee management."  But low-skilled American workers clearly remain much more productive than median workers in Third World countries.  And the median worker in Third World countries is profitably employed despite the fixed costs of employee management.  Note further that in countries with low labor costs, employers happily hire low-skilled workers to do all sorts of tasks that First World employers mechanize or do without.

4. Most economists aren't entrepreneurs.  The fact that we can't think of a productive job for a low-skilled worker is weak evidence for ZMP.  But if even ivory tower economists can think of productive jobs for low-skilled workers, that is strong evidence against ZMP.  And thinking of such jobs is easy.  My first stab: How about as personal servants for high-skilled workers?  In Third World countries, the middle class routinely hires live-in housekeepers, drivers, and so on.  In the worst-case scenario, we can learn from them.

5. If nominal wages for low-skilled workers had fallen massively and high unemployment persisted, I can understand why someone might start to wonder (not believe, but wonder) if such workers had ZMP.  But nominal wages haven't fallen massively.  They haven't fallen at all!  ZMP is literally a resolution in search of a paradox.

* Note the tension between stagnationism and ZMP.  If technological progress is stagnating, how can low-skilled workers be getting obsolete so rapidly?

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COMMENTS (12 to date)
RPLong writes:

I guess I am somewhere in between Caplan and Kling on this.

ABCT suggests that during booms, society is consuming capital in such a way that it looks as though we have achieved a sustainable long-run output pattern, when in reality we are pouring our hard-earned savings into methods of production that aren't sustainable. In other words, malinvestment.

ABCT's central prediction is that after the market corrects, we will have wasted valuable resources on malinvestment and output never "normalizes." We never regain what we lost, because we threw it after bad investments. The boom is a deadweight loss in the long-run.

So employees' MP(l) isn't zero in general, but it sure is with respect to the activities in which they were formerly engaged.

This kind of reconciles both sides of the story for me, but I guess neither Kling nor Caplan is ostensibly Austrian-School, so they are bound to disagree.

Thomas DeMeo writes:

Let's assume for a moment that a point in time does occur in human evolution where technological obsolescence of human labor actually starts to become a permanent trend. How would that look to economists as it is happening? Remember, it would probably only occur once.

The ZMP thing happens because people can't psychologically accept their new realities quickly enough, not because there is no rational way to be marginally productive. From an entrepreneurs point of view, why go after a niche dependent on convincing an angry labor pool that they are screwed, and now need to do laundry for a 27 year old software architect for 9$ an hour? Remember, we are just now crossing a threshold. Todays marginal productivity is going to erode even further quite quickly.

This is happening so quickly because that is how technology based gains occur. They require a large, slow and difficult up front commitment, but eventually achieve a critical mass and start to produce staggering gains. We are just now crossing into that realm with IT/communications. Massive waves of third world people are becoming enabled very very quickly now, and the recession just accelerated the oncoming labor imbalances.

brendan writes:

bryan, no comment, just a compliment. you're a ridiculously clear thinker.

Kenny writes:

I would imagine that imperfect measurements – and costs! – would render the 'zone' of zero-marginal-productivity significantly beyond an actual $0 productivity measure. Wouldn't the minimum wage alone render some workers as ZMP, even absent other attendant costs (both variable and fixed) of employing them? Is even the minimum wage (plus all of the other costs) sufficiently inexpensive to warrant any significant number of "personal servants for high-skilled workers"? I don't think so.

But on the slightly sunny-side, there are always employment opportunities in the various gray and black markets!

Chris Stucchio writes:
My first stab: How about as personal servants for high-skilled workers? In Third World countries, the middle class routinely hires live-in housekeepers, drivers, and so on.

As a person who has servants when I live in India, but no servants in the US, I can explain this.

Most low skilled US workers simply do not have the demeanor to be a servant. In India, there are many conscientious low skill workers. If your maid didn't leave school when she was forcibly married off at age 16, she might have worked hard, graduated college and gotten a decent job.

Additionally, if she doesn't do her job right, you will replace her with someone who will. Her next best alternative is dire poverty, so she makes damn sure the house is clean.

Now consider low skilled workers in the US. They are often not conscientious and lack skills simply because they put little effort into gaining them (e.g., by paying attention in a school where teachers actually show up).

Further, their next best alternative is not dire poverty, it's 99 weeks of unemployment which provides a standard of living comparable to upper middle class India. If you fire them, they don't much care, so good luck motivating them to do things right.

Roger Sweeny writes:

My stab: nursing home workers.

My mother-in-law suffered from dementia and spent her last months in a nursing home. Many of the other patients had been there several years. There is a tremendous amount of work that has to be done, and it is very labor-intensive. Much of it seemed to be done by immigrants--legal or otherwise.

I keep reading that something like half of all Americans will develop some sort of dementia, so there's going to be a lot of call for nursing home workers.

There are also lots of other chronic conditions that leave people alive but unable to fully care for themselves. Years ago, they may have just died, or been put in a chair in the corner. Today, some of these people go into nursing homes and some get the services of "home health workers," "home care aides," etc.--someone to bath you, dress you, clean your place, make a meal, whatever.

ajb writes:

Chris is exactly right. The "capacity" of most poor Americans to be reliable servants -- even of the non-subservient sort is very low. Social workers writing about men who cannot remain employed often note that these guys often quit McDonald's type jobs because they feel disrespected or cannot follow orders readily. The problem becomes worse for personal servants, because those hiring them must feel safe and not worry about theft, blackmail, violence, and even discrimination lawsuits. Thus, even those workers who are capable of serving in a fast food job would be incapable of working as servants in ways that would credibly signal to households that they are worth the risks and trouble of training them.

Jody writes:

We have people who mow our lawn (biweekly, though that's done for the year) and clean our house (weekly). So it's possible to find people.

Interestingly, my wife pushed hard for this arrangement as she's from India.

PrometheeFeu writes:

I would like to second Chris Stucchio's explanation. I grew up with live-in household staff in a third world country so I am very comfortable with the idea of having someone do my laundry, clean my place etc... (Though I also learned that managing household staff is itself a time-consuming and difficult activity) I have a good job and so while I could not afford live-in household staff, I considered hiring someone to periodically clean my place. In fact, my wife is coming back for Thanksgiving and I wanted to hire someone to clean up the place to her standards. However, after careful consideration I decided against it mostly for the reasons Chris exposed. I however had to add another problem. I have a little cat. He is adorable and very playful. However, he also gets easily excited and he sometimes playfully and lightly bites and scratches leaving little marks which all cat owners will recognize. I was worried that if this happened with a household worker, I would expose myself to liability and I don't think there is any way around that except expensive insurance.

Floccina writes:

Although I agree with you Bryan I think that with a sharp enough delta you could have a situation where some new technology is replacing some class on works faster than entrepreneurs can put them back to work. Of course that would show a lot of churn.

Noah Yetter writes:

Bryan, I assume you've never run a business / managed employees?

I assure you, ZMP is very real, and trivially easy to observe.

James A Donald writes:

The cost of employing people has risen dramatically in the last two or three years, which is going to reduce a lot of people's net productivity to zero.

Try to hire a nanny while complying with all relevant laws. You are going to wind up paying an agency one hell of a lot of money to do a lot of legal compliance for you, which makes it absurd to hire a low skill nanny.

The same, therefore, applies to any task.

There must be some people with zero marginal productivity, and there must now be a great deal more of them than there were four years ago.

In addition to increasing regulatory costs, there are increasing oversight costs. Your employee may assault your, rob you, and the police will be unhelpful. Your employee may call a member of the public who is harassing him a fag, and get you in serious legal trouble. Your employee may defend himself against violent assault, and get you in legal trouble, because someone who was not being assaulted thinks your employee used excessive force.

These are all costs of employing people that over the past few years have gotten rapidly and seriously worse. There is a lot more underclass violent behavior now than there used to be a few years back - google up flash mobs - and at the same time, the legal demands that businesses comply with increasingly obscure regulation have rapidly increased, while government demands that that employees turn the other cheek to customers and the public (or else their boss is at fault) have also escalated.

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