By David Henderson
I’m glad Arnold clarified his thinking in his latest post. He had written, as recently as two days ago:
But until the project manager comes up with a new plan, the other workers are all ZMP [capable of producing zero marginal product]. Think of the economy as being like that construction project, except that there is no project manager. There are only entrepreneurs acting in a decentralized fashion, guided by the price system. They don’t get it all sorted out right away. Until they do, ZMP prevails.
To me, that sounded as if he was saying that they have zero marginal product.
But in Arnold’s clarification today, he writes:
Reading David Henderson’s criticism, at first I could not understand his problem. He says that at one time I suggested that it would take a 25 percent cut in wages for workers to be employed, but then more recently I implied it would take a 90 percent cut in wages.
Look, I have no idea how big a cut in pay it would take. My point is that it is large. It would be a lot smaller if workers were willing to accept jobs that are far from their long-term comparative advantage. Taking a job as a truck driver might not even mean a drop in pay for workers who have recently lost their jobs. But people want to find a long-term source of comparative advantage. That is difficult in a complex economy.
So it turns out that Arnold and I are not disagreeing at all. We both agree that there are productive jobs out there that many people currently unemployed could get: they would have substantially greater than zero marginal product and they would get a wage that reflects that. In short, we both agree that zero marginal product is not a good description of the current productive ability in actually existing job openings of many of the currently unemployed. For that reason, ZMP is a term that deserves to be consigned to the dustbin of history. I think it’s time to think about the potentially huge role of, in many states, 99 weeks of unemployment insurance, in stretching out the labor market adjustment.
Incidentally, my 68-year-old cousin is an interesting example of the truck driver phenomenon that Arnold discusses in his latest post. He was selling health insurance in Phoenix and then saw ObamaCare coming. So in the summer of 2010, rather than wait a few years when he would be competing other unemployed health insurance salesmen, he looked into it and found that he could earn at least as much by training to be a long-distance big-rig driver. So that’s what he’s doing.