Monday, July 19, 2010

Zero Marginal Product Workers

There's an interesting debate going on over at Tyler Cowan's Marginal Revolution blog about Zero marginal product workers. Here's my theory, which I posted in the comments there:

Let's say Jack and John are both employed doing the same work while employment is high (and fear of unemployment is therefore low--if either loses his job he can likely find another one). Then the economy craters and Jack loses his job. John's fear of unemployment is now higher than it was, since he sees not only his colleague Jack get laid off but also dire unemployment figures in the news. Now fearful, John works harder to keep his job than he did when the economy was good, and by so doing makes up for the productivity lost by Jack's layoff.

To management, who measures only total productivity and not per-worker productivity, it looks like Jack was a zero marginal productivity worker. As the economy rebounds they're under no pressure to rehire Jack, so unemployment stays high.

I'd be interested in any reactions to this theory, and in finding out how one would formally describe it in economic terms.


Anonymous said...

Charlie, I'll bite. I'm not an economist nor do I play one on TV, and so my thoughts on this are only based on experience and observation.

I think your theory is strong, and it would be an excellent study to perform. I'm in a spot where staffing has been reduced and without a doubt the ones that are left are working harder. As you note, we're all working harder because of the inherent fear of negative consequences (because of our personal performance and our company performance) but also because there is just that much more work to get done.

I'm working harder now than ever before; I can't attribute it all to increased responsibilities and more complex projects. A good part of it is most definitely because my livelyhood is threatened by broad economic circumstances, and I feel that doing anything less than working my tail off is the wrong way to live.

My father has been in sales for years - now a
sales rep. for a cabinet manufacturers. His end of the business has been hit hard because of the downturn in construction and remodeling. He's squeaking by, but he's commented to me that he's never worked to sell something as hard as he is doing now. At a point where he should be thinking about winding down, he's having to leverage his skills in sales to the nth degree to make it work.

In both of our cases, I think our managers could safely make the case that with our higher productivity (or, in the sales case, of potentially higher sales if there were buyers) there isn't a need to increase staff to satisfy current work - we're getting it done already, and can likely get more done with just a little bit more effort. I can write more code, my dad can sell more cabinets, the company payroll can stay the same.

In reality that only holds true if the external dependencies remain close to the same - for me, there aren't additional projects that need to be done (a new client, or a new product offering) which would require more people; for my father it would mean no new clients, home improvement centers, etc. If the external dependencies change I hope that management would see the need to gently expand staff to ensure that existing resources can maximize their productivity.

Good luck with this - explore it more.

Charlie said...

Thanks, Brian. Even though traditional economics takes into account "expectation of future demand", etc., I don't think it captures what really goes on in people's heads when they look around and see tons of people out of work.

I'll continue looking into this phenomenon and report back.