Saturday, 31 December 2011

Unproductive employees.

As unemployment declines, the suitability of each succeeding person hired for vacancies also declines. That is because the fewer the unemployed, the less the likelihood of finding someone suited to any given vacancy.

In other words, as unemployment declines the marginal product of labour also declines.

When “suitability” declines to the point where the output of those hired does not cover the minimum wage / union wage / going wage, etc etc, employers tend to resort to consciously or unconsciously poaching each other’s staff. The result is that the price of labour is bid upwards, and inflation kicks in.

The latter problem could be ameliorated by inducing employers to take on relatively unsuitable staff with the assistance of a subsidy.

As to how to identify the “unsuitable”, that is not too difficult. Just let employers claim the subsidy in respect of any employee/s they like, but for a limited period. On expiration of the subsidy for any specific individual, if the employee is GENUINELY unsuitable, the employer will be happy to let them go. In contrast, if the allegedly unsuitable employee is in fact relatively productive, the employer will keep the employee and will be bluffed into paying the full wage.

There are numerous ways employers could game that system, but its not too difficult to think of anti-gaming rules to counteract the gaming.

P.S. 15th Feb. More discussion of the above idea here.



  1. Especially when you take into account the money saved on dealing with the negative consequences of having those people unemployed - worse health, crime, family breakup, negative attitudes of the children to education, employment and obeying the law. Could be an "investment" as far as the State is concerned.

    Also the employee might develop value after a while in steady employment.

  2. The result is that the price of labour is bid upwards, and inflation kicks in.

    Wouldn't we only get inflation if the increased income is spent, the reason why the Australian compulsory superannuation scheme is a good way of responding to wage pressure without causing inflation.

  3. Anon, I think you are suggesting that if the effect of raising demand and employment is inflationary, that inflation can be ameliorated by withdrawing money from wage earners’ pay packets to fund a superannuation scheme. Problem with that is that the “withdrawal” reduces demand (assuming government does nothing with the money it collects). So unemployment goes up again.

  4. Why not just scrap the minimum wage and get a negative income tax (or a consumption tax with a rebate)?

  5. Ralph, thought I'd post a follow-up comment here as it seems more appropriate. You said:

    "..ALL employment subsidies involve SOME displacement. But the important question is whether the subsidy facilitates an AGGREGATE increase in employment and GDP. To take an over simple illustration, if you have X subsidised people, and the subsidy increases aggregate employment by X, then there is no displacement in the aggregate, i.e. at the macro-economic level."

    I see that, and agree that for skilled workers employers still have an incentive to take on workers permanently, but they would still be incentivised to take all new workers on temporary contracts first and claim the subsidy. For unskilled positions, employers could just constantly recycle workers.

    "Also remember that public sector employers are under much the same cost cutting / output maximising pressures as private sector employers. The San Francisco city authorities recently awarded the contract to replace a large bridge to a Chinese firm employing Chinese labour. Those authorities are obviously not too concerned about creating jobs for Americans."

    This doesn't have to be the case though surely? With the right incentives (beyond pure cost), public sector employers can (and do) enact local labour clauses into contracts. In your example, it may well end up costing San Francisco more overall due to the costs of keeping local workers unemployed.

  6. Anon, In the simple case where the negative income tax replaces income £ or £, there’d be a big incentive for employers to reduce the pay of all their less skilled employees’ pay to zero or thereabouts. Nice for employers – not so good for taxpayers. Even if the negative tax only replaced 90 or 80% of each £’s reduction in pay, there’d be an incentive to drastically reduce pay and make good with cash under the counter or some other perk – not declared to the tax authorities.

  7. Ben, Re taking on all new employees as temporary subsidised employees, I had thought of that possibility. It’s one of the ways in which employers could “game the system” as I put it in the last paragraph of my post. I didn’t go into all the possible “games” for the sake of brevity.

    Anyway, a way round the problem you refer to would be to allow public employment agencies to remove subsidised employees from a given employer whenever those agencies wanted to. That could when those agencies found a more suitable job for the individual concerned. Or they could do it at purely random intervals. PLUS, a rule could be imposed to the effect that once removed from a given place of work by public employment agencies, the relevant employer would not be allowed to have to employee back within a given period.

    That would force employers to be relatively honest about distinguishing between employees they believed to be productive and those they believed to be peripheral: no employer wants to lose a productive employee, but they don’t mind losing peripheral employees.

    Note that that simply mimicks what would tend to happen in a totally free labour market. That is, in the absence of state organised unemployment insurance, the unemployed would tend to get low paid jobs pending the appearance of something better.

    Re the “constant recycling” of workers, that would not matter IN AS FAR AS the relevant employees were genuinely not too productive. That is, having people try a series of different jobs till they find their niche has much to be said for it. (Plenty of millionaires started their careers that way.)

    Re public sector employers acting in a more socially responsible way than the private sector, obviously there is some truth in that. But I think my point about the public sector being under cost cutting pressures still has some validity. Also the “generosity” of public sector employers towards their employees does not necessarily benefit society at large. For example I believe it is almost unheard of for state school teachers to be sacked. What head teachers normally do with underperforming junior teachers is to palm them off onto other schools. That’s nice for the junior teacher, but not so good for pupils.


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