Zero marginal product workers
19th July 2010
Tyler Cowen does his economist thing.
Matt Yglesias suggests the notion is implausible, but I am surprised to read those words. 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?
I’d like to know how many of them worked for the government. I have my suspicions.
This would actually seem to be a legitimate case of ‘right-sizing’. Firms are where they ought to be in terms of efficient use of human resources. And classical economic theory says that such is one of the benefits of economic downturns — business processes that were using resources inefficiently get that inefficiency wrung out, and sometimes that means that people get wrung out as well; the basic laws of economics really don’t care whether you as an individual had one of those misallocated jobs.
There is another striking fact about the recession, namely that unemployment is quite low for highly educated workers but about sixteen percent for the less educated workers with no high school degree. (When it comes to income groups, the lowest decile has an unemployment rate of over thirty percent, while it is three percent for the highest decile; I’m not sure of the time horizon for that income measure.) This is consistent with the zero marginal product hypothesis, and yeta few analysts ask whether their preferred explanation for unemployment addresses this pattern.axw