Response to Arnold on Zero Marginal Product
By David Henderson
In his latest response to co-blogger Bryan Caplan on ZMP, co-blogger Arnold Kling writes:
The point that third-world workers are employed refutes the Z in “zero marginal product.” I would agree that American workers could compete for jobs at third-world wages. But it still could be that marginal product is well below first-world wages.
To be clear, Arnold’s first statement above is his statement of Bryan’s criticism and then the next two statements are Arnold’s response.
I find Arnold’s response unpersuasive. There’s a lot of room between typical first-world wages and third-world wages. Let’s put some numbers in here. A typical third-world-wage is below $2.00 an hour. A typical first-world wage is $15 an hour. So if a wage well from $15 to $11.25 an hour, most of us would think of that as still a first-world wage. Why do I choose $11.25 an hour? Because that’s a 25% cut in wages. In an earlier post responding to Bryan, Arnold had written:
Even with discontinuous changes, the phrase “drastically enough” can be invoked to suggest that wage cuts could cure unemployment. But suppose that “drastically enough” means 25 percent or more. If you want to say that the PSST story of unemployment depends on wage stickiness because such a large wage reduction could take care of things, then fine. You have scored a debating point without practical significance.
So it’s not just “a debating point without practical significance.” Arnold has gone from saying that a 25% wage cut could solve the problem but that’s of no practical significance to suggesting that only a cut to third-world wage levels would motivate employers to hire many unemployed Americans. But that’s more like an 80 or 90% cut in wages.