Partial Equilibrium Persuasion

In one of my classes I had the opportunity to listen to a guest lecturer from someone who heads Stanford’s recycling department. She talked to us about recycling and why its important. And she came up with ‘Top Ten List’ for reasons to recycle (hopefully in a future post I’ll discuss why I dislike such lists). But the top two reasons on her list were: 1. Its good for the economy and 2. It creates jobs (a bit redundant I might say).

But her point was that when we recycle you employ someone to collect the waste, someone to receive it, someone to filter it, someone to process it, someone to sell it, and on on… she said around 10 jobs are created for each tonne of waste we recycle. Sounds like a good idea right? We recylce, and create jobs, a win-win for sure!

I hope my sarcasm was conveyed in that last sentence. This is too simplistic and a partial equilibrium analysis. Now I’m all for green-collar jobs and such, but lets say we didn’t have any extra unemployment (nothing above the rate of natural unemployment). Would this still be a good argument? If the economy is in a state of equilibrium such partial equilibrium analysis should only be taken with a grain of salt. If there is no involuntary unemployment, everyone has a job, so her second argument is total BS since a recycling program isn’t creating jobs but rather just reallocating labor from one job to the next. There is no net change in employment.

But her first point may be true, it could be good for the economy and society as a whole. That is only if people choose to actually gain employment in recycling professions. If people already have jobs, why would they move to a recycling-related job? For the vast majority of people a big incentive would be higher wages. And general production theory dictates that we pay wages that are equivalent to the marginal productivity of labor. So people will only earn higher wages if they their labor is more valuable and by the income approach we can see this reflected in a larger GDP.

The cobb-douglas production function for an entire economy is as following:

Where Y is GDP, K is capital, N is labor and A is any total factor productivity but most commonly referred to as technology. An increase in GDP due to recycling would be included in the A component since N has not changed but is more productive (lets assume that capital stays constant too or has negligible change due to recycling jobs).

But this is all contingent upon the premise that recycling related jobs are better paying than other jobs. But since there is such a variety of jobs that are related to recycling, its hard to say whether recycling will actually be better for the economy. For example, its easy to say that creating trash collector jobs isn’t going to be a great investment for our economy. But what if a bicycle-maker can produce more bicycle thanks to higher recycling of metal scraps, what if the firm is growing so rapidly it needs another high-paid manager. Such jobs will increase productivity of labor (assuming marginal productivity of labor is equal to wage) and help the economy. But its really hard to tell whether the sum of all jobs created by recycling is really better for the economy compared to the jobs people previously held. So until then I cannot give a definite answer.

In conclusion, yes recycling is good for the economy and in the current state with so much unemployment it could possibly create jobs. But the moral of the story is when people make such claims, do take them with a grain of salt because if the unemployment rate would not have been as high, this analysis may not hold.

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About alalani
I grew up in Tanzania and now I'm a student at Stanford!

2 Responses to Partial Equilibrium Persuasion

  1. RJ says:

    I’m unclear with the following statements: there is no involuntary unemployment, everyone has a job, so her second argument is total BS since a recycling program isn’t creating jobs but rather just reallocating labor from one job to the next. There is no net change in employment.

    Suppose people did want to work in the recycling industry -> thus it does create jobs.

    • alalani says:

      If there is no involuntary unemployment, it means everyone who is willing and able to work has a job. Given this, there is no one in the economy that is unemployed above the natural rate.
      If we use a partial equilibrium analysis of only the recyling industry. creating a recycling program does indeed create jobs in the recycling industry. But if we take a general equilibrium approach, the labor force has not increased (this was an underlying assumption) and the unemployment rate is still at the natural rate, so the fact that no new people have entered the labor force means that the people that are moving to these ‘recycling’ jobs have quit their previous jobs. This is the key point, people choose to switch jobs to the jobs in the recycling industry. So the number of jobs gained is equal to the number of jobs lost so net change in jobs is zero, ie labor has been reallocated within this economy.

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