Lump of labour fallacy
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In economics, the lump of labour fallacy (or lump of jobs fallacy, fallacy of labour scarcity, or the zero-sum fallacy, from its ties to the zero-sum game) is the contention that the amount of work available to labourers is fixed. It is considered a fallacy by most economists, who hold that the amount of work is not static. Another way to describe the fallacy is that it treats the demand for labour as an exogenous variable, when it is not.
Historically, the term "lump of labour" originated to rebut the idea that reducing the number of hours that employees are allowed to labour during the working day would lead to a reduction in unemployment. The term has also been used to describe the commonly held beliefs that increasing labour productivity and immigration cause unemployment. Whereas some argue that immigrants displace domestic workers, others believe this to be a fallacy, arguing that such a view relies on a belief that the number of jobs in the economy is fixed, whereas in reality immigration increases the size of the economy, thus creating more jobs.
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The phrase was originally used to dismiss the claim that reducing the number of hours that employees are allowed to work in a day inevitably reduces unemployment. This claim is based on the following reasoning:
- The number of hours of labour per day that are demanded by the market is constant.
- Suppose we reduce the hours any single person can work in a day.
- Now workers will produce fewer hours of labour.
- The difference between the constant in (1) and the reduction of productivity in (3) must be made up by employing more workers.
- Therefore the strategy in (2) increases employment rates.
The lump of labour rebuttal argues that (1) is false. (1) is the basis of a straw man argument. In all historical real-world economies, the number of hours of labour per day has always been, and always is, subject to price variation. Thus (1) is an inadmissible claim to make in present-day economics when describing processes that are applicable to the real world. A common superficially similar yet unequivalent position to (1) is at times taken by credentialed economists: namely that at certain specific moments in time, in certain areas, the number of hours of labour per day that are demanded by the market does not vary to the threshold required for statistical significance. The Straw Man argument continues as follows: given that there is naturally an administrative cost to hiring more workers, there is no reason to expect that production will be unchanged. People may simply keep their present employees and work them harder for the same time, or find ways to cope with the reduced output.
Application to employment regulations
This economic argument is commonly invoked against attempts to alleviate unemployment by restricting working hours. Such attempts sometimes assume that there is a fixed amount of work to be done, and that by reducing the amount that those who are already employed are allowed to work, the remaining amount will then accrue to the unemployed. This policy was adopted by the governments of Herbert Hoover in the United States and Lionel Jospin in France, in the 35 hour working week (though in France various exemptions to the law were granted by later centre-right governments). Many economists contend that such proposals are likely to be ineffective, alleging that there are usually substantial administrative costs associated with employing more workers, such as recruitment, training, and management, that would increase average cost per unit of output, leading to reduced production, and ultimately to even lower employment. However, in the case of preventing rather than alleviating unemployment, retaining existing workers in the face of a declining amount of total work to be done would not incur administrative costs, whereas firing and later re-hiring them could.
This common argument against the use of restricted working hours to reduce unemployment has recently been questioned, with one scholar arguing that "substituting a dubious fallacy claim for an authentic economic theory may have obstructed fruitful dialogue about working time and the appropriate policies for regulating it". Tom Walker holds that the lump of labour idea is a straw man, arguing that most proponents of restriction on working hours do not hold the simplistic view. He argues that a reduction of working hours can have similar labour-saving impacts as the introduction of technology into the production process.
Early retirement has been used to induce workers to accept termination of employment before retirement age following the employer's diminished labour needs. Government support for the practice has come from the belief that this should lead to a reduction in unemployment. The unsustainability of this practice has now been recognized, and the trend in Europe is now towards postponement of the retirement age almost everywhere except in France, where if according to the proposal of the French Socialist Party it might be returned from 62 to 60. In an editorial on The Economist a thought experiment is proposed where old people leave the workforce in favor of young people on which they become dependent for their living through state benefits. It is then argued that since growth depends on having either more workers or greater productivity the society cannot really become more prosperous by paying an increasing number of its citizens unproductively. The article also points out that even early retirees with private pension funds become a burden on society as they also depend on equity and bond income generated by workers.
The issue of the lump of labour, as well as that of the consequences of technological progress on employment, can be illustrated using simple tools of economic theory, by distinguishing the substitution and the scale effect of a change of the conditions of employment. The substitution effect considers the consequences on employment given the output level, the scale effect considers the consequence on employment of the change in the costs of production by way of the effect of the latter on the production level. In case of a reduction in labour time, there are two possibly contrasting effects: given technology you need more employees to produce the given level of output, but this can be offset or more than offset by the scale effect. Therefore, a priori, one cannot tell whether the reduction in the hours of employment will increase or decrease the number of employees.
Obviously, the scale effects depends on what happens to wages and the other conditions of employment. For instance, if monthly wages remain constant when the labour time is reduced the costs of production increase and this produces a negative scale effect on employment. But if wages are reduced to the extent to compensate for the consequences of the reduced labour time on the costs of production, the scale effect can be neutralized leaving only the substitution effect to operate. Another way could be to change the conditions of employment so as to compensate for the consequences of the reduction of labour time on costs.
For instance, the reduction of labour time in France was accompanied by a liberalization of the number of shifts, increasing the utilization of plants in the 24 h, offsetting to some extent at least the consequence of the reduction of labour time on costs. The same analytical tools can be utilized for considering the consequences of technical progress on employment.
Historically, the gigantic increase in labour productivity induced by technological progress since the industrial revolution has resulted in the dominance of the scale effect, bringing about both a massive increase in real wages and a decrease in labour time. There is no reason to expect that this same process cannot be continued in the future.
- Indivisibility of labour
- Labour (economics)
- Luddite fallacy
- Parable of the broken window
- Working time
- Walker, Tom (2007). "Why economists dislike a lump of labor". Review of Social Economy 65 (3). Retrieved 12 March 2013.
- John Bercow Incoming assets: Why Tories should change policy on immigration and asylum, Social Market Foundation, October 2005, accessed 16 September 2006
- Laurence Cooley, Macha Farrant and Dhananjayan Sriskandarajah Selecting wisely: Making managed migration work for Britain, Institute for Public Policy Research, November 2005, accessed 16 September 2006
- Walker, Tom (2007). "Why economists dislike a lump of labor". Review of Social Economy 65 (3): 279–291. doi:10.1080/00346760701635809.
- Walker, Tom (2000). "The 'lump-of-labor' case against work-sharing: Populist fallacy or marginalist throwback?". In Golden, Lonnie; Figart, Deborah. Working Time: International Trends, Theory and Policy Perspectives. London: Routledge.
- Buttonwood (11 February 2012). "Keep on trucking: Why the old should not make way for the young". The Economist.
- Ramon Marimon; Fabrizio Zilibotti (April 1999), DP2127 Employment and Distributional Effects of Restricting Working Time, retrieved 21 May 2014