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Wednesday, June 01, 2005

The amateur economist

OK I'm not really an amateur because I am technically an economics professor, but this post is so amateurish that writing it is not doing my job but procrastinating.

Something odd has happened to US employment or rather something odd hasn't happened. After decades of amazing growth it has, more or less, stagnated since the last recession. This is very odd. Now economists shouldn't have ideas on such important topics at 3 in the morning but I've been doing other stuff you know.

The simplest neoclassical model of labor demand implies that employment should have shot up especially fast since productivity growth has been extraordinary and real wages have not kept up.

I have a very silly model (which is probably inconsistent with the data). Let's assume that managers don't do anything useful and that top managers know this and always have. Imagine if management is and has always been rent sharing, a full employment program for the over educated middle class (quoting J. Q. Wilson but for some reason he applied the phrase to theminiscule federal civil service). Now it is a fact that part of the productivity speed up was due to downsizing, delayering etc, that is, laying off lots of middle managers.

This caused a reduction in unit labor costs. However if top managers always believed that middle management was all about giving cushy jobs to people like them, this would have no effect on their estimates of marginal cost. If middle management is a luxury not a cost, reduced layers of management do not imply production should be increased.

Another way of describing this fantasy is what if top managers always assumed that they could increase production without hiring more middle managers. Middle managers salaries would be a fixed cost and should not have any effect on production decisions. A decline in the ratio of middle management to output would not imply a reduction in marginal cost. Thus if labor saving is concentrated in pointless labor, huge productivity increases and stable real wages are consistent with normally slow output growth.

Now I am perfectly willing to believe that lots of layers of managers are semi parasites on production workers (not as parasitic as me but still not needed for production). I am more reluctant to believe that top managers are clear on the concept of marginal cost, but, hey, anything is possible.

Notice that even to the extent that productivity growth is due to technology the new technology (like blogger) doesn't have much to do with actually making things, and more to do with blah blahing more efficiently.

Now another way to tell this story is that CEOs discovered that they can steal as much money as they want from shareholders. Thus they realized that beds were being feathered with the down payment for their new mansion not with dividends. Thus they got much tougher about sharing rents. In all cases working for shareholders, working to get rents to share or working to get another hundred million, CEOs might have made rational decisions but always counted jobs for the boys as part of profits not costs. Thus a change in their choices about what to do with economic profits causes a huge productivity speed up but no GDP growth speed up.

Needless to say, this "model" is more or less a joke. I am sad to admit that there are data on production workers vs non production workers and that I won't even look at them, because I have no doubt that they prove that my silly model is silly.

update: I wish Blogger didn't hide comments. I understand that comments automatically up here would create problems for, say, Atrios, but I have so few comments that I wish they were all as visible as possible.

Econgeek asks why now ?

"Im not competent to judge if the model is silly or not (and have an eversion to actually looking at the data, so I wont) but it seems to be rely fairly heavily on the idea that something changed in the minds of upper management in this last recesion; in particular all of a sudden they realized that they could keep the rents in more direct ways than before. i dont understand what causes this change in their expectation. In other words; even if I buy the story: why now?


the more general idea of middle management as class parasites to be appeased however is extremly entertaining and could perhaps find a home in some other model.
# posted by econgeek : 5:24 AM"

I actually have an answer to that one. To me the event is downsizing which caused the productivity speed up. The break is in the mid 90s not now. It is only the last recession and current slow growth that made it clear that the speed up was a genuine break in a trend and not a temporary effect of an overheated economy.

The story is about the 80s with an overvalued dollar, Japan as number one and takeovers. The idea that there are too many layers of managers in the US is based partly on comparing large US firms to large Japanese firms, that is, Toyota showed that a huge firm can do just fine with about half as much corporate bureaucracy as GM. Given foreign competition, some firms had no rents to share and had to get efficient. Also corporate predators forced managers to maximize shareholder value.

Then the pressure let up in the 90s, because the dollar came back to a sensible level, Japan imploded and the takeover wave ended when Drexel Burnham Lamber and the shady S&Ls which financed it went under. However, once top managers had bitten the bullet and laid off white collar workers, they decided to try to take the rents in cash and discovered they could get away with just about anything and are now as ruthless from greed as they had been from fear.

The result of this fear and greed is a productivity miracle.

I don't believe any of this, but I find the story amusing.

The only problem is that I am an economics professor, so I really shouldn't blog about economics without casting discredit on my allegedly serious work. Maybe I should use a pseudonym.

1 comment:

econgeek said...

Im not competent to judge if the model is silly or not (and have an eversion to actually looking at the data, so I wont) but it seems to be rely fairly heavily on the idea that something changed in the minds of upper management in this last recesion; in particular all of a sudden they realized that they could keep the rents in more direct ways than before. i dont understand what causes this change in their expectation. In other words; even if I buy the story: why now?


the more general idea of middle management as class parasites to be appeased however is extremly entertaining and could perhaps find a home in some other model.