ZMP, Morale, and Statistical Discrimination
By Bryan Caplan
Recent Twitter exchange between myself and Tyler:
@tylercowen: [ZMP] is about morale effects in the workplace, not “finding something for them to do,” the latter is trivially easy.
@bryan_caplan: This reply deserves mischief-free elaboration.
@tylercowen: Is there a difference?
@bryan_caplan: Asking “Is there a difference?” counts as mischief.
I’m very pleased to see, then, that Tyler has fulfilled my request for mischief-free elaboration:
The point is simple: some workers destroy a lot of morale in the
workplace and so the employer doesn’t want them around at any price.
Most of us buy into “morale costs” as a key reason behind sticky
nominal wages. If your wage is too low, your morale falls, you produce
less and so the wage cut isn’t worth it. Well, what else besides low
wages makes people unhappy in their workplace? Very often the quality
of co-workers is a major source of unhappiness; just listen to people
complain about their jobs and write down how many times they are
mentioning co-workers and bosses. (I do not exempt academics here.) A
“rotten apple” can make many people less productive, and you can think
of that as a simple extension of sticky nominal wage theory, namely that
installing or tolerating a “pain in the ass” is another way of cutting
wages for the good workers, they don’t like it, it lowers their
productivity, and thus it is not worth tolerating the rotten apple if
said apple can be identified and dismissed.
There is no particular reason to think that ZMP workers are
especially stupid or in some way “disabled.” If anything it may require
some special “skills” to get under people’s skins so much.
Though I’m pleased, I’m also puzzled. Tyler’s story is almost indistinguishable from a standard insider-outsider model: Employers refuse to hire because new workers rub existing workers the wrong way. In the past, I’ve invoked this model to explain why employers don’t use two-tier wage policies (high wages for existing workers, low wages for new workers) to bypass wage fairness norms. And at least in conversation, Tyler has long objected that existing workers’ morale suffers when employers pay new workers more than existing workers, not less. What gives, Tyler?
Tyler fleshes out his argument with an appeal to statistical discrimination:
Note also the “expected ZMP worker.” Let’s say that some ZMPers
destroy a lot of value (that makes them NMPers). You pay 40k a year and
you end up with a worker who destroys 80k a year, so the firm is out
120k net. Bosses really want to avoid these employees. Furthermore
let’s say that a plague of these destructive workers hangs out in the
pool of the long-term unemployed, but they constitute only 1/3 of that
pool, though they cannot easily be distinguished at the interview
stage. 1/3 a chance of getting a minus 120k return will scare a lot of
employers away from the entire pool. The employers are behaving
rationally, yet it can be said that “there is nothing wrong with most of
the long-term unemployed.” And still they can’t get jobs and still
nominally eroding the level of wages won’t help them.
Again, I’m puzzled. If (a) morale is the problem, (b) morale depends on perceived fairness, and (c) perceived fairness depends on nominal variables, why wouldn’t nominally eroding the level of wages help?
In the perceived, statistical, expected value sense, the lot of these workers is that of ZMPers.
One policy implication is that it should become legally easier to
offer a very negative recommendation for a former employee. That makes
it easier to break the pooling equilibrium.
Makes sense. In fact, this is yet another example of my diamond in the rough problem. But if Tyler thinks that statistical discrimination can explain years of high unemployment, why is he so incredulous when I claim that statistical discrimination can explain years of socially wasteful education?