Wednesday, July 21, 2010

Zero Marginal Product Workers

One of my complaints about how most people summarize the seminal Lewis model of migration and economic development. The key assumption is that the marginal product of labor is higher in cities/manufacturing than in rural/agriculture, and so people move. The way this is typically summarized by students is "rural people are lazy and don't produce anything." No, that's not what the model says. The model is not about laziness or any other pejorative.It's not even about permanently low productivity in agriculture since an increase in capital and agricultural research can increase labor productivity.

This week, Cowen defends the notion of people who produce nothing in advanced economies and presents several theories that would explain it. First, he notes that if you can let 7% of your work force go (he says 10% because that's the unemployment, but we were at over 3% before the recession) and suffer no loss in GDP, that sure sounds like a bunch of people not contributing to GDP. Secondly, unemployment is highest (~30%) among unskilled workers rather than skilled workers (~3%). A commenter, Tom West, adds the important point that some of the effects show up only slowly and not in GDP numbers: food poisonings increase, morale drops, failure rates creep up.... Then comes Cowen's brilliant, philosophical part:
Nothing in the zero marginal product hypothesis requires that these marginal products be zero forever.  As the entire economy expands more rapidly (when will that happen?), the value of even a low quality worker can quickly become much higher.  If you are opening up a new building, suddenly you really need that extra janitor and he is indeed more productive at the new margin.
Some people identify the zero marginal product hypothesis with the "hopeless dregs of the earth" description, but the two are not necessarily the same.  Complementarity, combined with some fixed initial factors, can yield zero or near-zero marginal products of labor.  (You'll see the phrase "excess capacity" used in this context, though that matches the oligopoly hypothesis more closely.)  The "dregs of the earth" view is pessimistic, but the complementarity version of the zero marginal product idea can be quite optimistic, predicting a very rapid recovery in the labor market, once the interactions turn positive. 
The "dregs" and the "complementarities" views also have different policy recommendations.  The dregs view implies either hopelessness or a lot of fundamental retraining or ongoing assistance, while the complementarity view leads one to ask how we might mobilize positive complementarities (rather than leaving orphaned factors of production) more quickly.

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