Sunday, January 16, 2011

Zero Marginal Product of Labor

Kling talks about it and it has come up on the webosphere for some time.  It is the idea that employment at the bottom rung of the ladder is impossible because they cannot find something profitable to do.

If the firm and the household have high accuracy in attempting an agreement on labor, then both parties calculate the central government tax and entitlements channel, the roundabout payment system.  Neither party has that much precision to devote to reverse engineering that channel, so they bound the entitlement/tax channel into something called the tax cost of employment, a looser bound around the calculation but a much simpler calculation.  Once we all agree on that bounded function, then we can just include one quant of entitlement in the wage agreement. When the entitlement quant is unstable or inefficient, the bounded function grows, we increase the quant due to forecasting error from the past.

The effect of the entitlement quant is to band the employment agreement within the bounds, so straight away the agreement collapses if the entitlement quant is not met. What we  have is a large group of unemployable that do not meet the entitlement quant.

How much unemployment is due to the entitlement quant?  the way to measure that is to get information on the underground labor market.  Remember, we still hunt for wage deals, even when government prevents employment we do it by other means.

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