Garett Jones  

Sticky Price Keynesianism & Monetarism are ZMP Theories

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Why are apparently good workers unemployed for so long in recessions? One channel that Tyler has promoted is ZMP: Some workers are almost completely unproductive, so employers can them rather than have them eat up all the pizza on Pizza Fridays.  

One might debate the pros and cons of the idea.  And of course it's not to be taken literally: Perhaps as in Sargent and Ljunqvist's story about high European unemployment the "ZMP" workers just lose half of their productivity due to, say, job-specific technological change.  As Patsy says in Holy Grail, only a model

But I'm not here to debate the existence of ZMP: I'm here to note that mainstream macroeconomics already believes in ZMP.  Any story of recessions that relies heavily on the story that "stuff doesn't get sold because businesses don't cut their prices enough" is a story of ZMP workers.  If price rigidity is important--and at least some evidence suggests that it is--then when total dollar spending falls, some of the hit to spending shows up as a fall in the quantity of output and not just as a fall in the price of output.  

In a sticky-price slump, there's less real demand for goods so output really is "demand-constrained."  And if output can't be stored then low demand for output means that it's only valuable to have as many workers as you need to meet demand.  People used to by 1000 burgers a day but now they're only buying 900?  The restaurant manager knows how to produce 900 burgers and it's not by paying workers to just stand around.  Especially when the machines and equipment to make the burgers are already sitting right there, it's obvious which input you'll cut back on: work hours. It takes fewer labor hours to make fewer burgers, end of story. Any extra labor hours are just, well, ZMP.  

At this point, the only way to destroy the simple sticky-price ZMP story is to say that unemployed workers will cut their wage demands so low that the restaurant manager decides to spread the fixed amount of work across more workers.  But if it costs a fixed amount to keep each individual employee on the rolls---due to paperwork costs, health care, management attention--then spreading the work around becomes really expensive (Eli has more on the related topic of labor nonconvexities). The hourly wage would have to fall a lot to make work-spreading reasonable, so low that we're getting back to, well, ZMP. 

Keynesians, New Keynesians, and Monetarists alike use price rigidity as part of their toolkit to explain why a fall in nominal spending turns into a decline in real spending.  And lurking in the background of their stories is the idea that if real spending falls, so do the number of labor hours needed to make the stuff that people are buying.  Any extra work hours are, well, ZMP.  


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COMMENTS (10 to date)
david writes:

Re-read Cowen's post, the one that you linked it. He explains the difference between his ZMP theory, which is rather more specific than merely observing that some workers have zero MP (which is necessarily true in any model with both non-zero non-search unemployment and flexible wages):

Keep in mind, we have had a recovery in output, but not in employment. That means a smaller number of laborers are working, but we are producing as much as before. As a simple first cut, how should we measure the marginal product of those now laid-off workers? I would start with the number zero. If a restored level of output wouldn't count as evidence for the zero marginal product hypothesis, what would? If I ran a business, fired ten people, and output didn't go down, might I start by asking whether those people produced anything useful?

...

In general, which hypotheses predict lots more short-term unemployment among the less educated, but among the long-term unemployed, a disproportionately high degree of older, more educated people? This stylized fact seems to point toward search and recalculation ideas, with some zero marginal products tossed in. Do aggregate demand theories yield that same data-matching prediction? I don't see it, at least not without being paired with a theory of concomitant real shocks.

The whole point of demand-constraint models is that Y is constrained and isn't surging merrily along whilst leaving U high.

Nick Rowe writes:

If you said they were ZVMP theories (Zero Value Marginal Product or Zero Marginal Revenue Product theories) in one sense you would be correct, but in another sense you wouldn't. Yes, they are ZVMP for the firm that hires them, given the constraint in AD, but not ZVMP in the bigger picture, if that constraint were lifted.

My old post: http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/08/zmp-workers-and-output-quotas.html

Marcus Nunes writes:

I tend to agree with Nick and have illustrated the question thus:
http://thefaintofheart.wordpress.com/2013/04/15/chilling/

Garett Jones writes:

Nick:

I say we focus on the sense in which I'm correct... ;)

kebko writes:

"In general, which hypotheses predict lots more short-term unemployment among the less educated, but among the long-term unemployed, a disproportionately high degree of older, more educated people?"

I have to think that there are some demographic explanations here that mitigate the apparent problem. The problem of unemployment is different for a 55 year old that took an early retirement package and a 30 year old with 3 kids at home. There are a lot of baby boomers out there with an unclear employment status. I don't think it's hard to imagine a percent or 2 of the labor force in this situation who might pick up some part time or consulting work over the next decade to keep busy or to supplement their retirement savings. It certainly explains the fact, as described, and a very generous unemployment insurance policy would also help push people in these vague categories into the "long term unemployed" classification.

RPLong writes:

IMO, we're not talking about ZMP employees, we're talking about ZMP positions of employment. Economists (and executives) spend a lot of time analyzing workforce productivity, but they never spend any time analyzing management efficacy.

What I mean is, if a company ends up with several unproductive people on-staff, how did that happen? Is it because there is plenty of work to go around, but the particular employees hired will not do the work? No, that's not what we're talking about in the macroeconomic sense, at least not so long as there is work to be done and a unemployment is > zero.

No, we're talking about people who have jobs, but there isn't sufficient work to justify the position.

Well, whose fault is that? The managers! Good management completely avoids this kind of situation.

So sure let's talk about ZMP employees. Let's also talk about NMP (Negative Marginal Productivity) managers.

Roger McKinney writes:

Yes, they are ZMP theories!

Tyler Cowen could learn a lot from the Austrian business cycle. I realize Cowen thinks he understands Austrian econ, but comments like those on the ZMP prove he doesn’t.

Unemployment doesn’t happen only by employers laying off people.Businesses fail and all of the employees of failed businesses lose their jobs. Usually those businesses are in capital goods industries that expanded too much during the boom years. They are ZMP for businesses in other industries for which their skills are not useful. It takes time to train an auto worker or carpenter to be a nurse, even if they wanted to.

At the same time, the ABCT says that businesses will purchase labor saving equipment in the midst of recessions to boost the productivity of remaining workers. That starts the upswing in gdp, but not necessarily employment because employers will have existing workers work overtime before they hire an extra worker. The marginal costs of new workers don’t increase continuously, as the calculus suggests, but in huge stair steps because of the high costs of healthcare and payroll taxes.

The latest recession has played out according to the ABCT play book.

Floccina writes:

I look around and see plenty of work that is on some value and could be done by very low skill workers but is not. My theory is that it is always the deltas (change in) that cause the problems. People are being laid of in some businesses faster than they can be used in other ways. We could use more errand runners, more landscape workers, more car cleaners etc. but it takes time for these business to lower there wages and prices and for people to notice the lower prices and there are many factors that slow the processes. So I do not get Tyler's point.

One thing that I think we miss is that the cash non-taxpaying economy grows in a recession in part to route around some of the costs and speed bumps that slow the process of employing low skill people in new areas. If taxation where more efficient that would help.

Zachary writes:

Garret, First Major Disagreement with you while I've read this blog: There is NOT a shortfall of real demand. There is a NOMINAL drop in demand. Nominal money needs increasing in order to decrease nominal prices. When the nominal Money growth slows, then prices stick and take time to adjust. This is a nominal demand story.


Real demand for goods, and for money, is determined by real variables. Unless you tell an RBC story, then there is no drop in real demand that is separable from the interaction between the nominal and the sticky prices. You are right that real demand 'falls'. But that is only by definition of identity. Causal in a GENERAL sticky price story are nominal variables.

michael pettengill writes:
Keynesians, New Keynesians, and Monetarists alike use price rigidity as part of their toolkit to explain why a fall in nominal spending turns into a decline in real spending.

Isn't the actual explanation that:
- under employment leads to low demand
- low demand leads to firm losses from fixed capital demands
- firm losses lead to decreased employment
- decreased employment leads to more reduced demand
- that leads to firm losses as capital demands loom larger and decreased employment
- repeat until depression creates war or revolution
- war leads to pillage and plunder that redistributes the wealth to promote increased demand, unless society choses a different path

Unless loan balances, capital rents, are equally flexible, capital becomes a larger and larger part of the economy while labor income falls forcing consumer demand to fall.

Friedman suggested that contracts be dictated by government to be variably priced according to a government determined price index. In a time of deflation, your bank balance would be reduced, but so would your loan balance due, and your rents would be reduced.

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