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.