Imagine, just imagine, that the government put a quota on the total output of, say, cars. Because some rabid environmentalists told them to. The result would be a drop in employment of auto workers. Some of those workers, who had skills useful in other sectors, would be able to find jobs elsewhere. Others, who had little or no alternative skills, would be unemployed.
Would we describe those unemployed car workers as being Zero Marginal Product workers? Not really. They are still exactly as capable of producing extra cars as they were before. It's just that their potential employers are no longer able to sell any extra cars.
Would we describe those unemployed workers as being Zero Value Marginal Product workers? Yes and no. Depends what you mean. The extra cars they could produce would have zero value to the firms trying to sell them, because they aren't allowed to sell any extra cars. But those extra cars would have exactly the same value as before to the people who wanted to drive them, but who now can't, because of the output quota on cars.
Also see Tyler Cowen's article in Foreign Policy where he argues that high unemployment is caused by a decrease in the productivity of American workers:Would wage cuts help employment of car workers? Not really. An individual car worker who was willing to work for lower wages might get the job that would otherwise have gone to another worker, but that doesn't help aggregate employment of car workers. Maybe if they all cut wages their employers would use more labour-intensive methods of producing cars. That could help employment of car workers. But it would hurt employment of all the other factors used to produce cars. If all factors used in producing cars cut their "wages", that wouldn't help aggregate employment of all factors (not just workers) used in producing cars.
Now imagine, just imagine, that the government put a quota on the total output of everything, not just cars. Because the environmentalists told them that GDP is bad, and needs to be controlled. Now it's not just car workers who are unemployed. All sorts of workers are unemployed. And the unemployed workers who have skills useful in other sectors can't get jobs in those other sectors. Because there are no other sectors.
Are the unemployed workers Zero Marginal Product workers? No. Are they Zero Value Marginal Product workers? Yes and no. Depends what you mean. The extra output they could produce is still valued by the people who don't have it (who are mostly the unemployed workers themselves), but it's not valued by the firms producing it, because they aren't allowed to sell it. Would wage cuts help? Maybe a little, but not really. If wages of labour fell relative to the wages of land and machinery, firms would maybe use more labour-intensive methods of producing the same total output. But that would simply replace unemployed labour with unemployed land and machinery. If the wages of all factors fell, it wouldn't help total employment of all factors.
Let's push this analogy further. Suppose the rabid environmentalists have heard about tradeable quotas, and that they are a good idea. They issue a fixed number of "GDP permits" to households. Each household can spend its permits on whatever good it likes, at whichever firm it likes.
The Statistics Canada employees who normally measure each firm's contribution to GDP are asked to check that each firm actually receives from households the requisite number of GDP permits. And because of the standard value-added intermediate goods problem in measuring GDP, the Statistics Canada employees convince the environmentalists and government that it's much easier if each firm collects GDP permits equal to the value of its sales, and in turn pays its suppliers with those same GDP permits. So the GDP permits flow all the way down the supply chain to the owners of the ultimate factors of production, and then those households in turn use the GDP permits they earn to buy goods from firms. This makes enforcement a lot easier, since the firms will want to ensure they get the GDP permits when they sell goods, because they need those permits to pay their own suppliers, workers, and owners. It's a bit like the GST (VAT), only in reverse.
The Statistics Canada employees recognise that the tradeable GDP permits are themselves valuable, so measure the prices of goods to include the value of the GDP permits received in exchange. A tradeable permit is just like a tax, and Statistics Canada decides to measure GDP inclusive of indirect taxes like VAT and the GDP permits. So firms compete for those GDP permits, by trying to offer low prices for high-quality goods. And the lower the price, the fewer GDP permits the firm needs to collect when it sells the goods. Eventually the GDP permits become so valuable that the firms are willing to give away their goods for free, except for the GDP permits. And households too are willing to give away their labour for free, except for the GDP permits. "You can drive this car off the lot for 15,000 GDP permits!". "Staff wanted; pay is 15 GDP permits per hour".
Now, the environmentalists in my story may be a bit rabid, but they do understand the stock-flow distinction. They know that a fixed stock of GDP permits may permit many different levels of GDP, which is a flow. It all depends on how quickly GDP permits circulate from households to firms, and back to households again. They introduce the concept of the "velocity of circulation" of GDP permits. Since it's too hard to put a "use by" date on each GDP permit, they decide to adjust the stock of GDP permits in circulation to try to offset changes in velocity. If velocity rises, so GDP rises above the environmentalists' target they reduce the stock of GDP permits in circulation by buying them back. They create a special "Central GDP Permit Bank" just for this purpose. And if velocity falls, so GDP falls below the environmentalists' target, the central bank increases the stock of GDP permits in circulation.
And the environmentalists in my story may be a bit rabid, but they also understand the distinction between nominal and real GDP. Since all goods and labour are now free, except for the GDP permits you need to pay in exchange, all prices are now measured in terms of GDP permits. If the stock of GDP permits is too small, individual firms and households will cut prices in terms of GDP permits, trying to compete for GDP permits against other firms and households. So the value of each permit will rise. And if the stock of GDP permits is too large, individual firms and households will raise prices in terms of GDP permits, since they worry less about competition from other firms and households. So the value of each permit will fall. So the environmentalists use their central bank to adjust the stock of GDP permits in circulation to try to prevent their value rising or falling too quickly.
Then one day the system breaks down. Something causes the velocity of circulation of GDP permits to fall. The central bank fails to respond quickly enough to increase the stock of GDP permits. (Because environmentalist hawks are afraid this would cause the value of GDP permits to drop). So the value of those permits starts to rise, so people hoard even more GDP permits against an uncertain future, which reduces velocity still further.
So we end up with a lot of apparently Zero Value Marginal Product unemployed workers.
Everything changes when you don't just use barter to trade stuff, but have to use money/GDP permits instead.
(This started out as a response to Bryan Caplan. But then I got carried away.)
...Many conservatives in the United States have placed the blame for high unemployment on the shoulders of President Barack Obama, arguing that his administration's liberal agenda has complicated the recovery. But the statistics suggest otherwise. Again, corporate profits and consumer spending are fine. Indeed, it's the sector in which the government has most directly intervened -- health care -- that has maintained the most robust job growth over the past two years, adding 20,000 new jobs in November alone. And don't go blaming job losses on illegal immigrants taking jobs from documented workers: Latino immigrants have left the country in large numbers since the start of the financial crisis.
As time passes, it is harder to avoid the notion that a lot of those old jobs simply weren't adding much to the economy. Except for the height of the housing boom -- October 2007 through June 2008 -- real GDP is now higher than it has been in the entirety of U.S. history. The fact that the United States has pre-crisis levels of output with fewer workers raises doubts as to whether those additional workers were producing very much in the first place. If a business owner fires 10 people and a year later output is almost back to normal, it's pretty hard to make the argument that they were doing much in the first place.
The story runs as follows. Before the financial crash, there were lots of not-so-useful workers holding not-so-useful jobs. Employers didn't so much bother to figure out who they were. Demand was high and revenue was booming, so rooting out the less productive workers would have involved a lot of time and trouble -- plus it would have involved some morale costs with the more productive workers, who don't like being measured and spied on. So firms simply let the problem lie.
Then came the 2008 recession, and it was no longer possible to keep so many people on payroll. A lot of businesses were then forced to face the music: Bosses had to make tough calls about who could be let go and who was worth saving. (Note that unemployment is low for workers with a college degree, only 5 percent compared with 16 percent for less educated workers with no high school degree. This is consistent with the reality that less-productive individuals, who tend to have less education, have been laid off.)
In essence, we have seen the rise of a large class of "zero marginal product workers," to coin a term. Their productivity may not be literally zero, but it is lower than the cost of training, employing, and insuring them. That is why labor is hurting but capital is doing fine; dumping these employees is tough for the workers themselves -- and arguably bad for society at large -- but it simply doesn't damage profits much. It's a cold, hard reality, and one that we will have to deal with, one way or another.
...the U.S. economy is going through some major structural shifts. It's not a question of getting back to where we were, but rather that the economy must solve a new problem of re-employing a lot of people who were not, in reality, producing very much in the first place. That's a steeper challenge than we had realized early in the stages of this recession -- and so far policymakers have failed at meeting it.
Analysts still disagree on how rapidly the U.S. economy will recover. But they're missing the point. The era of low unemployment may be in our rearview mirror for a long time to come.
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