Eli Dourado

Caplan on the ZMP hypothesis

I’m puzzled by Bryan Caplan’s hostility (1, 2, 3) to the ZMP hypothesis. It is hard to think of another idea that is more Caplanian. This is after all the man who pointed out that “the lower deciles don’t contribute that much to the economy, anyway.

Bryan’s Jock/Nerd theory of History has been so influential on my thinking about the ZMP hypothesis that I explicitly linked them in haiku form (bewildering CNBC correspondent Jane Wells, among others). The ultimate revenge of the nerds is developing tools that make jocks literally useless and, as I hypothesized in my last post, powerless.

Bryan has expressed skepticism of the discontinuities and nonconvexities necessary to push marginal product literally to zero in a recession. But nonconvexities abound in the labor market. Most importantly, there are fixed costs of employee management. If a jock is not producing much when demand is normal, is it really so unbelievable that a firm would cut him loose when demand falls, rather than keeping him at a lower wage and continuing to pay the costs of managing his unconscientious ass? The jock’s wage demands could be totally flexible, but we hit the zero wage lower bound and he is unemployable.

If you combine modest, introspectively plausible labor market nonconvexities with a secular trend of diminishing jock-labor value and a cyclical fall in aggregate demand, you would expect what we have now: a long trend of increasing income inequality and median wage stagnation and a recession that generates the most unemployment in the lower deciles. Why fight it, Bryan? In your heart, you know it’s true.

UPDATE: Bryan replies!