The blind leading the deaf

I’ve heard of “three strikes and you’re out” laws, aimed at putting repeat criminals behind bars if they mess up too many times. But the CNMI’s recent “three years and you’re out” law is certainly a new wrinkle in the labor economics realm.

A few businessmen cornered me the day the law hit the papers. They seemed pretty upset. I had to admit to them that I think it’s pretty funny. As I understand it, it requires contract workers (who aren’t classified as management) to leave the island for six months after they’ve been here for three consecutive years.

The economics of the law are simple. The law reduces the productivity of contract labor. It does not, however, increase the productivity of local labor. In fact, it will ultimately reduce (yes, reduce) the productivity of local labor, because it will ultimately reduce the amount of capital on the island. It will reduce the amount of capital, of course, because it will cripple some businesses. All of this gibberish is sort of rooted in a relationship known as the Cobb-Douglas production function, which I won’t bother to delve into.

The island is awash with unqualified, non-economist economists who can get some very juicy contracts from the government if they have the right connections. You’ll be hearing more from them soon. Look where they got you…and if you think that’s funny, look at where they’re taking you. Talk about the blind leading the deaf.
You have to admit, it’s comical. An economic Benny Hill show.

(On a serious note for economists: It could be argued that reducing the supply of labor will increase the marginal productivity of the labor that remains. Keep in mind two points: First, our labor pool is not homogeneous, so you can’t assume that the productivity of one segment is necessarily directly changed (increased) by changes in supply (decrease) of the other sector. Second, assume this extreme case: assume zero contract workers here. Now make an assumption about how big the economy would be. Based on that assumption, take a guess as to how productive labor will be in an economy devoid of capital.)

Most businessmen, even if they don’t know Cobb-Douglas from corn on the cob, have an intuitive sense of what it means for business if employees have to leave every three years for some kind of unpaid, unwanted six month vacation. And here is the real story. Never mind the economics of “three years and you’re out,” why bother to talk about it? The real story is the wake up call to business: the economic environment here is getting tougher.

But there’s no use crying over spilled milk. The amount of money invested in businesses here is a sunk cost. It’s gone. The non-economist economists have said that businesses will stick around to “recover their investments.” Huh? Maybe in Alice and Wonderland, but not in the real world. The only issue for any business is whether or not the future is expected to bring positive cash flow. The calculation, of course, is specific to each business, but more and more are going to crunch the numbers, look at the way the economic environment here is changing, and are going to head for the exits along with their contract workers.