Bryan Caplan  

ZMP, Morale, and Statistical Discrimination

Sticky Price Keynesianism & Mo... Speech: The Perverse Economics...
Recent Twitter exchange between myself and Tyler:

@tylercowen: [ZMP] is about morale effects in the workplace, not "finding something for them to do," the latter is trivially easy.

@bryan_caplan: This reply deserves mischief-free elaboration.

@tylercowen: Is there a difference?

@bryan_caplan: Asking "Is there a difference?" counts as mischief.
I'm very pleased to see, then, that Tyler has fulfilled my request for mischief-free elaboration:
The point is simple: some workers destroy a lot of morale in the workplace and so the employer doesn't want them around at any price.

Most of us buy into "morale costs" as a key reason behind sticky nominal wages.  If your wage is too low, your morale falls, you produce less and so the wage cut isn't worth it.  Well, what else besides low wages makes people unhappy in their workplace?  Very often the quality of co-workers is a major source of unhappiness; just listen to people complain about their jobs and write down how many times they are mentioning co-workers and bosses.  (I do not exempt academics here.)  A "rotten apple" can make many people less productive, and you can think of that as a simple extension of sticky nominal wage theory, namely that installing or tolerating a "pain in the ass" is another way of cutting wages for the good workers, they don't like it, it lowers their productivity, and thus it is not worth tolerating the rotten apple if said apple can be identified and dismissed.

There is no particular reason to think that ZMP workers are especially stupid or in some way "disabled."  If anything it may require some special "skills" to get under people's skins so much.
Though I'm pleased, I'm also puzzled.  Tyler's story is almost indistinguishable from a standard insider-outsider model: Employers refuse to hire because new workers rub existing workers the wrong way.  In the past, I've invoked this model to explain why employers don't use two-tier wage policies (high wages for existing workers, low wages for new workers) to bypass wage fairness norms.  And at least in conversation, Tyler has long objected that existing workers' morale suffers when employers pay new workers more than existing workers, not less.  What gives, Tyler?

Tyler fleshes out his argument with an appeal to statistical discrimination:

Note also the "expected ZMP worker."  Let's say that some ZMPers destroy a lot of value (that makes them NMPers).  You pay 40k a year and you end up with a worker who destroys 80k a year, so the firm is out 120k net.  Bosses really want to avoid these employees.  Furthermore let's say that a plague of these destructive workers hangs out in the pool of the long-term unemployed, but they constitute only 1/3 of that pool, though they cannot easily be distinguished at the interview stage.  1/3 a chance of getting a minus 120k return will scare a lot of employers away from the entire pool.  The employers are behaving rationally, yet it can be said that "there is nothing wrong with most of the long-term unemployed."  And still they can't get jobs and still nominally eroding the level of wages won't help them.

Again, I'm puzzled.  If (a) morale is the problem, (b) morale depends on perceived fairness, and (c) perceived fairness depends on nominal variables, why wouldn't nominally eroding the level of wages help?

In the perceived, statistical, expected value sense, the lot of these workers is that of ZMPers.

One policy implication is that it should become legally easier to offer a very negative recommendation for a former employee.  That makes it easier to break the pooling equilibrium.
Makes sense.  In fact, this is yet another example of my diamond in the rough problem.  But if Tyler thinks that statistical discrimination can explain years of high unemployment, why is he so incredulous when I claim that statistical discrimination can explain years of socially wasteful education?

COMMENTS (9 to date)
MG writes:

I don't know why TC is dismissive but one reason could be that he thinks that both forms of statistical discrimination are bound to yield sub-optimal results. However, on average employers make more and more visible (a) decisions to hire than (b) decisions (indecisions?) about passing over. Thus, they want to (are expected to) do "more" than just "stereotype" when facing (a), whereas they care less if they do it in the context of (b).

LDL2 writes:

>Though I'm pleased, I'm also puzzled. Tyler's story is almost indistinguishable from a standard insider-outsider model: Employers refuse to hire because new workers rub existing workers the wrong way.

I have to disagree with this part. The sour apple work damages existing moral which actually has results on existing productivity.

The insider outsider model is on the theory that you effectively will get a sour apple. That isn't a rational expectation, though a possible result.

Himanshu Sanguri writes:

Why to consider the long unemployed pool to be ZMP category on the assumption that if hired they would hamper the productivity. The case can be opposite too, when out of zeal to perform and prove, a long unemployed can contribute much higher to productivity if hired, then expected. But, one thing is sure, chances of rub between a new and old employee are always high, that is the reason why many mature organizations prefer to hire from employee referrals.

Morgan Warstler writes:

I solve for this stuff too:

I don't know why Caplan doesn't pick up the ball and run with it.

Glen Smith writes:

Still wonder why so many places become more mediocre when they try to get rid of those they define as ZMP. Based on this. I'd hypothesize that the ability to find good people sans heuristics goes down.

MingoV writes:

My experience is that morale problems have numerous causes, and that worker perceptions of low pay and benefits usually have small effect on morale.

Here's my ranked list of causes of low morale:

1. A bad boss (too many ways to list)

2. A bad coworker: slacker, gossiper, nasty, back-stabber, credit-grabber, etc.

3. Lack of respect from other workers or from customers.

4. Lots of troublesome customers.

I experienced all of these during two decades of directing labs.

#1 was straightforward: counsel the supervisor and, if she doesn't improve, fire her.

#2 was treated like #1, except the supervisor handled it.

#3 was handled by giving guided tours of the lab to nurses and other hospital workers so they could see the complexity of our operations.

#4 was handled by me speaking with the problem customer (usually a physician). If the customer continued to be a problem, we dumped him.

@Glen Smith: My experience is that an employee-recommended hire is no more likely to fit in than a new hire. An experienced employee from somewhere else is less likely to fit in than a new hire, but the experienced person's knowledge usually compensates for the extra friction.

Jacob A. Geller writes:

@MingoV, all of those other causes notwithstanding, it's not so much that low pay will reduce morale. It's that *lower* pay will reduce morale. People want raises, not pay cuts. The direction of wages is more important here than the level.

Many employers could cut wages across the board right now and hire an additional worker with the savings -- i.e. they could effectively hire a worker for free -- but they choose not to because the existing workers don't want a pay cut. If they got that pay cut, morale and productivity would suffer.

In some cases investors might also not like the pay cut. They might consider it a signal of trouble, and get spooked. Management doesn't want that.

The reasons you listed are also important, but they exist alongside the existence (or nonexistence) of pay cuts.

Les Cargill writes:

Decisions based on morale are almost certainly bunkum. People don't hire because they are incented not to hire, pretty much full stop. The perceived risk of a new hire is that the new equilibrium will be (in some way other than morale) worse.

Let's do a minimax analysis. If the new hire is *better* than the existing employee stock, then the existing employee stock must resist the new hire at all costs, including *synthesizing* a "morale problem." If the new guy isn't up to the existing employee stock, then it is that particular case.

So that leaves a band of "competence" and this multiplicatively filters many candidates out.

If an organization is, by some miracle, actually aware of what makes effective employees, they'll have this problem less. But the incentives to distort that information flow are so great....

People are generally pretty blissfully ignorant of their own rent-seeking within an organization. Worse, the organization adapts rent-seeking *as* performance, or the two otherwise converge.

Remember that the better angels of our nature very nearly have no place at all in the workplace. If the world was a fair place, most
people would be decidedly worse off....

If our commandment is to grow or die, then we can only do so by the creation of robust new firms. Human nature is no ally to that end...

Eric Hammer writes:
Again, I'm puzzled. If (a) morale is the problem, (b) morale depends on perceived fairness, and (c) perceived fairness depends on nominal variables, why wouldn't nominally eroding the level of wages help?

I think what Tyler is getting at is that morale is not only dependent on perceived fairness, but in the case of some ZMP/NMP workers based on how bloody annoying they are to work around. Some people just make everyone else's lives miserable.

The other issue is that many of the worst ZMP people (at least those I have worked with) appear very productive on the surface, but spend a ridiculous amount of time drawing people into meetings, chatting about irrelevant things and all sorts of other useless activities. They often appear to be beneficial and hard working, but in reality they just slow the whole place down.

Of course, it isn't clear to me that many employers can effectively spot such workers, and if they can, actually fire them without getting sued. How they spot or suspect them in the hiring pool is still another question; as businesses can't be sure who is who, why do they think anyone else knows the difference well enough to justify the assumption that someone unemployed for a while is ZMP? If I see a 20$ bill on the sidewalk, I don't generally assume that no one has picked it up because it is covered in an invisible contact poison that others are aware of, even if it looks like it has been there a while.

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