The Lump of Labor Fallacy

A few weeks ago, we talked about false choices on the blog. These are situations where a belief that there are only two variables falsely constrains the debate. More women are in the workforce these days so therefore they must be spending less time with their children. Smaller class sizes will increase student achievement. And so forth.

Today I’m talking about another fallacy: the lump of labor fallacy. Stick with me, please! This is in response to NicoleandMaggie’s post at Grumpy Rumblings of the Untenured on All the Money in the World. N&M got excited that I was tantalizingly close to a soundbite in my book on this topic. This still isn’t a soundbite. But I do think it’s fascinating how things look different at the micro level vs. the macro level, leading to a bad understanding of economics.

The lump of labor fallacy is the (false) belief that there is a set amount of work to be done in an economy. Therefore, by changing certain variables, you can directly increase the number of jobs. So, for example, if most people work 40 hours a week, by mandating a 35 hour workweek, you can create turn 7 jobs (7 x 40 = 280 hours) into 8 (8 x 35 = 280 hours). Or, if an economy has 100 million workers, and 5 million are over the age 65, by nudging those 5 million people out of the workforce (via pension carrots or mandatory retirement age sticks) you can create 5 million new job openings for younger people.

Brilliant, right? So politicians propose these sorts of labor rules all the time.

From a very short term perspective, and from the micro perspective of one company, there does appear to be a set amount of work. If one of your colleagues retires, you replace him. If someone works out a job share agreement, one job becomes two. Stores tend to be open a certain number of hours, without this number changing too frequently. So if you need someone at the cash register, and each person can only be there 35 hours, this looks like it would create more jobs. Or fatter paychecks through overtime.

But from a larger social perspective, the amount of work to be done in an economy is a highly fluid quantity. To see the fallacy in the 40- vs. 35-hour workweek concept, just push the argument out a little farther. Why not mandate a 10-hour workweek? Then we could have 4 times as many jobs (or a lot of overtime)! Except you immediately see the inefficiencies. It’s the rare job these days that would be done equivalently well by four people each working 10-hour days vs. one person working 40 hours. Each person would have less expertise, and would therefore be less productive — even in jobs that don’t seem to be so variable. An experienced person at a cash register in a fast food joint can boost ticket totals and process people faster, making lines look shorter. That can make other people stop by the restaurant who might not do so otherwise. The lower productivity achieved from a shorter workweek on an individual level would be mirrored in the economy as a whole — which would not produce nearly as many jobs as simple arithmetic would suggest. Plus, how much do you pay people for 35 hours vs. 40 hours? It’s long been socially difficult to cut wages, but in general, firms can’t pay people the same for 35 hours vs. 40 without cutting into profits. If profits are fat, that’s one thing. If they’re not, then firms on the margin might decide to be open fewer hours and to hire fewer people, rather than hire more people or fatten paychecks with overtime, as the policy makers hoped.   

(There’s an interesting argument out there that the efficiencies actually do peak at 40 hours, and then the marginal returns decline, but that’s a story for a different day).

As for encouraging people to retire, a 70-year-old worker may, in the abstract, be “taking a job” that a younger person could have. But what if that 70-year-old accountant brings in so many projects because of his network that he’s got four people just churning through the stuff he brings in the door? A 25-year-old probably won’t approximate that. There is no lump of labor. More people working in a productive capacity tends to make the economy grow — and that’s what creates opportunities for young people, not shoving one particular class of people out to pasture.

When you realize how elastic labor is, the fallacy becomes apparent. But I’m still amazed how many people buy into it. I was talking with a woman once who was discussing the problems of bringing chain stores into a community. She was incensed that chains claimed to “create jobs.” She insisted that they were hiring people away from other businesses. That is, she believed there were a set number of workers in a community. But this isn’t true either. There are some people who are in the labor force no matter what, but there are others whose willingness to work is more elastic — based on whether the getting is good. Think moms with kids in school who’d get back in the workforce if jobs seemed plentiful, teens who don’t have to have a job but would like one, a retiree who’s bored with watching TV and would work if there was a convenient way to put in 15 hours a week. When more jobs are on offer, the labor force expands.

20 thoughts on “The Lump of Labor Fallacy

  1. Thanks for this!

    Europeans are still very stuck in that “fixed number of jobs” mindset. Of course, their labor markets are much more rigid and it’s harder to destroy jobs, so they do have less flexibility. But still– if more Europeans were working there would be more goods and services.

    I’ve tried explaining it in terms of the most productive workers being people we want to work. I’ve tried making analogies to women entering the labor force. I’ve tried explaining how we actually want *everyone* to work and be productive because that increases overall productivity so there’s more stuff to buy.

    I’ve tried explaining that no, even in academia that a “fixed” tenure track line may be replaced by 4 adjuncts.

    Really, they just don’t believe me.

    I did get through to a fellow economist (who is at a MUCH better school than I am… I’m at an R1, he’s at a top 10-15, and should really know better) going backwards– if we remove someone who is productive with someone who is equally (or less) productive there’s lost productivity in the economy just from transition/hiring costs (searching for a new worker, being without a worker etc.). But that’s not something most reporters are going to understand. And it’s difficult to make supply and demand graphs showing how employment can go up (even if wages drop) over the phone. Or how a competitive labor market is naturally in equilibrium and putting limitations on that can only decrease productivity (not true with monopsonies, externalities etc.)

    1. @N&M – I hadn’t thought about using the example of women entering the labor force. If there was a lump of labor, they would have replaced men. What wound up happening is that the US economy absorbed just about every woman who wanted to work in some capacity, without much male displacement at all (the slight lowering in labor force participation for men is probably more related to the decline of manufacturing than anything else).

      1. The lowering in the labor force participation of men more related to social security and pensions! (Since it is mainly concentrated at the age 50-55+ ages.) Costa has a book on the subject and Quinn has a series of papers that look at what happens to male labor force participation after.

        Also the GI bill getting guys to spend longer in education, depending exactly when you’re talking about. (Yes, also changes in industrial mix, with an increase in clerical work– but men used to do the clerical work, it wasn’t always female-dominated. Goldin’s book on women’s labor supply is really fascinating. Guy Michaels also has an interesting paper on the rise of clerks with industrialization.)

  2. Interesting post! This all makes sense to me, but I have never thought hard about it. One of my biggest regrets about my college education is that I never took a proper econ class. At the University of Chicago! What was I thinking? (Answer: between the required core classes and the requirements of my major, I had very few electives.)

    Anyway, I can tell you what they paid me when I worked 35 hours/week for awhile after my first daughter was born: 35/40ths of my prior salary. It was a great arrangement for me, because it eased the crunch caused by having a daughter with really crappy sleep patterns. It was also a pretty good deal for my company’s clients (I was a contractor billed out by the hour), because honestly, I got pretty much the same amount of actual work done- I just got more efficient. I *think* I’ve kept those efficient work habits now that I am back to a 40-45 hour week, and no longer charging hours… but I wouldn’t swear to it.

    1. @Cloud – thinking about it, this actually introduces another variable into the equation: worker preferences on hours. In past recessions, firms almost never cut hours and wages, preferring to use layoffs. With layoffs, the thinking goes, you choose who you want to get rid of. With wage cuts, your most ambitious people walk out the door to competitors. BUT perhaps that is more a male model of work. Given how many women want to work part time (it’s literally like 70-80% of working mothers), maybe many of your best workers really do want to work a reduced week. Moving them to part-time means they’re more likely to stay, rather than leave.

      1. You know I had to chime in here 🙂 I have a TON of coworkers who’d jump at the chance to work part-time, even just to go down to 35 hours, both male and female.

        Our culture is such that you’re expected to be available/online 24×7 it seems, so having an actual part-time arrangement makes it easier to draw boundaries. I think that’s one of the things I love about it – once I convince my manager to let me do it, I don’t have to justify why I leave work by 6, or don’t work on Friday or whatnot.

      1. @Laura

        Boston College has an entire center on researching Flexible Workplace Options. It’s not just women who want them these days. Lots of people want to down-shift. Including more expensive older male workers… (of course, they also want to keep their full-time benefits, whereas women often have the option of going on their spouse’s plan).

        1. Did you see IBM’s latest offer? They are offering their older workers a chance to work reduced hours (for reduced pay), with a guarantee they won’t be laid off… but they have to retire by a certain date. I can’t remember where I saw this written up. Slashdot?

          At the company where I had the 35 hour week, lots of employees had flexible arrangements- male and female, parents and not. I think the fact that it was so common is part of what made it possible to do without getting put on some “mommy track”.

          1. Uh… that’s not 100% legal. IBM is on shaky ground there. I foresee lawsuits. Unless they’re framing it as contract work and offering that deal to everybody, not just future retirees. Still… it sounds like a lawsuit waiting to happen.

          2. I’m sure I have some details wrong. IBM must have phalanxes of lawyers, I can’t imagine the deal (whatever it is) hasn’t been vetted by them.

  3. I discuss this with a friend who is a grad student in economics. Since I got laid off and care for my own children, the economy has lost basically two jobs- the job I used to have, and the job my childcare worker used to have. However, this shows the limitations of looking at only “paid work” in the labor force. On the flip side, billions of dollars in care is provided to elderly people who need it by their relatives.

    As I look for work, the model of needing to work 40-50 hr/week to be employed is common. I wish employers could break out of it, but for reasons largely having to do with benefits, they don’t. Our local hospital just went to 12 hr shifts and is laying off a bunch of nurses (mostly part-timers) to reduce benefit costs.

    1. There are so many things employers could do re: benefits for part-time workers – allow folks to opt out of benefits entirely, pro-rate them (what my company does) and have a minimum hours worked requirement, or charge more for them to part-time folks. I think they just don’t want to deal with the special arrangements when there are so many poeple willing to work the crazy hours they want…

      1. Yes, at HP under Mark Hurd, the attitude was “Why have 50 engineers to work 2000 hr/wk when we could lay off 10 engineers who won’t work 50 hr/week and keep the 40 engineers who will work 50 hr/week?”

  4. “(There’s an interesting argument out there that the efficiencies actually do peak at 40 hours, and then the marginal returns decline, but that’s a story for a different day).”

    Actually, Laura, the theory that is out there is MUCH more interesting than that. It’s Sydney Chapman’s theory of the hours of labor and it argues that the optimal number of hours decreases progressively with improvements in technology. So 40 hours a week may have been optimal for, say, 1950 but the optimal today would be much less.

    As for the claim of a “lump of labor fallacy” it’s an adaptation of an old (1780) myth about the reason workers objected to harsh working conditions, low wages, long hours and high unemployment. The claim was a straw man argument in 1780 and it is even more of a straw man today because it is simply recited like a old poem in a schoolbook.

    People don’t advocate shorter hours because “they think the amount of work to be done is fixed”. They advocate shorter hours for a myriad of GOOD reasons.

    1. I’m too busy to really chime in but I wanted to say that this is a very important point. the 40 hour work week was created before emails, smartphones, or even faxes. I think we can easily get the same amount of work done at 35 hours.

      I also think corporations take advantage of workers all too often. they rather have 1 person working 40+ hours and never taking vacations than hire 2 people to work reasonable hours. I am in that situation and believe you burn out quickly and don’t do a better job. Sure I am more of an expert and able to work on projects independently etc.. but burnout is a real issue.

  5. Small businesses and entrepreneurs have a unique perspective on this… I’ve had assistants and not had assistants and I still get my work done… so some working an organization is more on the revenue line and some is more optional etc. For example in a small business when you have to choose between sales and marketing you choose sales though you always try to do the marketing… one of the great challenges for small business owners is to find employees who are hungry enough to work on things all the time… etc . i got up early today on a saturday and I might do some bookkeeping while catching up on some of my shows. a salaried employee wouldn’t do this but as a business owner with a very good bookkeeper who sticks to an 8hour budget (it took me six years to find this bookkeeper thank you us tax policy) I know that in doing that work I will keep our bookkeeping and tax costs down… this mentality is hard to find in a big company where some man with astay at home wife (completely out of date management frame of reference) is telling people they have to work 50 hours in a cubicle… you’ve written great stuff about how yes you can make 50 hours in your pajamas without a commute… and how maybe we don’t all want to work part time but cut the bs out of work…

    1. training and hiring are time sucks too… so sometimes in small business land it is easier to have one of the owners work 5o or 60 hours or a current employee than to hire someone part time for 10 or 20 or even full time hours.. b/c of the risk and the fact that they might not be working that entire time, have questions etc. that said good folks are part of growth so hr is an important skill to offer small business owners

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