Keynesianism as a ZMP Story
By Bryan Caplan
I’m not a fan of Tyler Cowen’s view that many unemployed workers have Zero Marginal Product (ZMP). Cowen and Lemke:
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.
Caplan frames the argument in terms of the nasty effects of raising
labor costs. Um, we have a problem with demand, not supply; time to
reread Keynes on wages.*
As far as I can tell, Krugman is saying that when there’s insufficient Aggregate Demand, cutting wages won’t increase employment. And how is that possible? If workers’ marginal product is zero (or less). After all, as long as a worker has a positive marginal product, there will be some wage low enough to make it profitable to employ him.
Keynesians could certainly respond that, unlike Tyler, they think that workers’ ZMP is an artifact of low demand, not a feature of a modern skill-based labor market. But before they do, I’d like them to admit that the Cowen-Keynesian debate isn’t about the reality of ZMP workers. It’s about whether the ZMP status of the unemployed is structural or cyclical.
Either way, I’ll stick to my view that a 5-10% fall in real labor costs would rapidly return us to 4% unemployment – and remain baffled by economists who hastily second-guess the textbook solution to a modest labor surplus.
* Here‘s my original reply to Krugman.