Lump of labor fallacy

A standard idea in economic theory that there is a fixed amount of work in an economy to be divided up among the total supply of laborers, instead of a quantity that changes with the economic climate. This a term in standard economic theory, developed as an answer to two common policies that governments sometimes use to address unemployment.

The first is shortening the work week to "create" jobs. When unemployment is high, governments sometimes legislate a shortened work week or impose a cap on the number of hours workers can work. The idea is to "divide up the labor" evenly among available workers, and thus create more jobs.

The second involves protectionism and labor migration. A standard argument for protectionism is that markets or industries need protection from foreign markets that are more efficient or have lower labor costs, e.g., "our jobs are going overseas".

The lump-of-labor fallacy says that these are based on faulty reasoning, since the amount of available work is not fixed: new jobs are created or disappear based on the cost of labor (wages), the cost of money (exchange rates and interest rates), innovation, and other economic variables. In particular, the labor picture evolves with structural changes in the economy, e.g. the transition from a goods-based to a service-based economy.

It should be noted that this idea is somewhat controversial because it hinges on several standard economic assumptions, especially the mobility of labor and capital. A large factory in a small town that closes to move overseas creates a real loss of jobs that can be devastating to workers in the short term. The theory assumes that in the long run the displaced workers will either move to other areas where there are jobs, or that new employers will move in to take advantage of the increased labor pool.

It's one thing to describe a faulty economic theory; it's quite another to aggrandize it with the name 'fallacy', implying that it arises from faulty reasoning, rather than faulty assumptions. The term 'fallacy' lends an incorrect connotiation of logical rigor, and even an erroneous theological certitude, to the alternative theory. Whether this reflects some subtle attempt at mind control on the part of laissez-faire capitalists remains to be seen.

Dogma is bad; no force of economics applies all the time, over the whole world. In times when the capacity to extract and process natural resources is growing, the amount of available work is not fixed, and the lump-of-labor idea fails. However, the idea indeed applies in limited areas, for limited periods of time (e.g. market lag), especially in areas of limited natural resources. In such circumstances, the amount of available work is indeed fixed, or even contracting.

Another thing that remains to be seen is whether the Earth's natural resources are limited enough to create a situation like this all over the world.

A mistake made by some people (usually without a grounding in economics) that the labour market is assumed to be static and heterogeneous. For example, in country X there can only be 3,000,000 jobs available, and therefore reducing trade barriers, increasing immigration, relocating production offshore or adding labour-saving technology to the production process will somehow stop locals from getting jobs. Stealing jobs is a common expression, as if an employee-employer relationship is something tangible and possessable.

What is forgotten is that the labour market is continually changing. New technology will displace some workers, but will create jobs elsewhere. Foreigners in developing countries performing the same jobs as what those in developed countries were doing ten years ago will demand imports. The profits gained by investors thanks to increased labour productivity could then be used for further investment.

In the 1950s some doomsday prophets feared mass-unemployment due to employers mechanising manufacturing. That hasn't happened.

The policy of the Loi Aubry in France (the 35 hour work week) was based on the Lump of Labour fallacy, and thus did not contribute to any sizeable rise in employment. It was hoped that by forcing employers to restrict their staff to working a limited number of hours a week, more staff would be required to be hired to make up the difference in labour requirements. Instead, as this represented an unwanted wage rise to employers, jobs were simply relocated offshore, automated or the existing staff were simply made to work harder within their allocated hours of employment.

What is of issue is the ability for workers in threatened industries to retrain themselves to make themselves employable for opportunities in emerging industries.

ref: http://www.pkarchive.org/column/100703.html