Utopia, you are standing in it!

Jim Feyrer put forward a clever hypothesis about the sudden decline in the average quality of managers as a major contributor to the 1970s productivity slowdown. His hypothesis is a good contribution to real business cycle theory because what could be more random a shock than a demographic shock arising from the baby boom.

Feyrer’s hypothesis builds on Robert Lucas’s theory of the entrepreneur and the optimal size of the firm. The better entrepreneurs can manage larger spans of control.

Specifically, these more talented entrepreneurs can spread their skills and vision over a larger workforce thereby raising its productivity and that of the firm. Better quality managers are better trainers, better leaders, better problem solvers and better at recruiting and retaining staff.

If managerial skill and talent accumulates with experience, an influx of young workers into the workforce with the influx of the baby boomers into the workforce will lower the average quality of entrepreneurs. This will show up empirically as a decrease in the average age of managers and with that their experience and skills.

With the average age of the labour force lower during the influx of the baby boomers, more marginal managers have to be promoted into managerial positions to supervise younger employees. Lower managerial quality will lower the productivity of the workforce as a whole.

If managerial talent and skill is to have any meaning, a more talented manager should be able to extract greater productivity from the same quality labour force. Lazear points out that

Supervision and management are fundamental in personnel economics and in the theory of the firm… Boss effects are large and significant. Most important, bosses vary substantially in their quality. A very good boss increases the output of the supervised team over that supervised by a very bad boss by about as much as adding one member to the team.

The influx of less able managers in the 1970s, as shown by a five-year reduction in the median age of US managers in the chart below, accounted for 20% of the observed productivity slowdown and resurgence in the 1970s and 1980s according to Feyrer. To fill vacancies, employers had to drop their hiring standards for managers.

Source: Jim Feyrer The US Productivity Slowdown, the Baby Boom, and Management Quality, Journal of Population Economics (2011) and Bureau of Labor Statistics Employed persons by detailed occupation and age (2013).

When the median age of managers rose in the 1990s, and along with it the average of quality of management, this productivity slowdown was reversed. Both the increase in the decrease in the age of managers are random productivity shocks in the tradition of real business cycle theory.

The average age of the US manager was 38 in 1980 and 39 in 1990. There is no US managerial occupation with an average age of less than 40 in 2013. The fifth managerial occupation with the lowest managing age is food service managers. The highest outside of agriculture is chief executives,

Source: Bureau of Labour Statistics Employed persons by detailed occupation and age (2013).

One of the mocking tones directed at real business cycle theory is it was supposed to require a regular forgetting of technologies so that productivity fell and then the loss technologies were remembered a few years later to have a business cycle.

That forgetting and remembering is what happened with the average age of managers and labour productivity in the 1970s. Management quickly lost five years of experience then slowly regained it with matching productivity swings and roundabouts.

Feyrer is another addition to a long line showing that business cycles can arise from the sum of random shocks, rather than one big shock, as Prescott suggested in 1986:

Another Summers question is, Where are the technology shocks? Apparently, he wants some identifiable shock to account for each of the half dozen postwar recessions. But our finding is not that infrequent large shocks produce fluctuations; it is, rather, that small shocks do, every period.