Productivity, labour demand, and employment

This topic has come up a couple of times in comments on previous posts. Suppose there's an increase in labour productivity. Maybe because of improved technology. How will that affect labour demand, and employment?

I'm just going to work through the absolutely standard long-run classical textbook analysis of this question, with the help of a couple of diagrams. There is nothing new here for advanced macroeconomists. This post is aimed at people who have a basic understanding of introductory economics.

The answer is that labour demand can either increase or decrease, though "normally" it will increase. And employment can either increase or decrease, though "normally" it will decrease. (I will try to explain what I mean by "normally", but it roughly corresponds to "what has normally happened historically".)

We start with a production function, which shows how much output can be produced with varying amounts of labour, holding capital, land, and technology constant. That's the red curve in the first diagram, labelled "old production function".

The production function slopes up. As you increase employment, you produce more output. But the slope decreases as you move up along the production function. That captures the idea of diminishing returns. As you add more and more labour to a fixed stock of capital and land, holding technology constant, the extra output from an extra hour of labour (the "marginal product of labour") decreases. The slope of the production function is the marginal product of labour.

The red curve on the second diagram shows how the marginal product of labour falls as employment increases.

If the economy is perfectly competitive, firms will maximise profits by choosing a level of output and employment where the marginal product of labour equals the real wage. The red curve is both the marginal product of labour curve, and the labour demand curve. Start on the horizontal axis, at a given level of employment, and the height of the curve tells you the marginal product of labour. Start of the vertical axis, at a given real wage, and the curve tells you the level of employment at which the marginal product of labour will equal that wage. And that's the quantity of labour the firm will demand at that wage.

Now suppose technology improves. We can get more output with any given amount of labour. The production function shifts up. We now have the new, orange production function.

What happens to the labour demand curve when the production function shifts up? That depends. It depends on precisely how the production function shifted.

Suppose the production function shifts up the way I have drawn it. Notice that the slope of the production function increases at any given level of employment. That means the marginal product of labour increases at any given level of employment. And that means the labour demand curve also shifts up, to the orange curve in the second diagram.

An improvement in productivity (in this case) causes an increased demand for labour. That's what a lot of people can't handle. It just sounds wrong. "If productivity increases, you won't need as much labour to produce any given amount of output, so the demand for labour will fall". That's the Lump of Labour Fallacy. Who says output will stay the same?

When productivity increases, we can: consume the same amount of output and work less; work the same amount and consume more; or any combination of the two. We would even consume a little bit less, and work a lot less, if we wanted. It depends on what we want. It depends on preferences.

The dark blue curve labelled I on the first diagram is an indifference curve. It shows preferences. The representative person in this economy is indifferent between any of the points on that curve. They would prefer to consume more output, and would prefer to work less, but exactly the right trade-off between extra consumption and extra work will leave them indifferent, so it slopes up. But it gets steeper as we move up along it. That's because the more hours we are currently working, the more extra consumption we would need to persuade us to work an extra hour and give up one more hour's leisure. The slope of the indifference curve is called the Marginal Rate of Substitution between leisure and consumption.

The dark blue line on the second diagram shows how the MRS (the slope of the blue indifference curve) increases as hours of employment increases.

If the economy is perfectly competitive, a person will maximise utility by choosing to work that number of hours at which the real wage equals the MRS. The extra consumption you get from an extra hour's wages will be just enough to compensate for the loss of an hour's leisure. So the dark blue curve is both the MRS curve and the labour supply curve. Start from a level of employment on the horizontal axis, and the height of the curve tells you the MRS between leisure and consumption of the typical person. Start from a level of real wages on the vertical axis and the curve tells you how many hours people will want to work.

When productivity improves, and the production function shifts to the orange curve, people are better off. They can have more consumption while working less at the same time, if they want. They can get onto a new, higher, indifference curve. That's the light blue curve in the first diagram.

What happens to labour supply when productivity improves, and people are better off? That depends on the shape of the new indifference curve. The way I have drawn it, the new curve will be steeper than the old curve at any given level of employment. That means the labour supply curve has shifted up and to the left. Labour supply falls. For any given real wage, people will want to work fewer hours now they are better off. (Remember, all output gets paid to people as income in one form or another, either as wages or as non-wage income; capitalists are people too.)

So, what happens to employment when productivity increases?

We can look at either diagram to give us the (same) answer. The second diagram tells us that equilibrium is where the supply and demand curves cross. That's where the MRS (the height of the supply curve) equals the Marginal Product of Labour (the height of the demand curve). The first diagram tells us that equilibrium is where the indifference curve kisses the production function. If two curves kiss, they must have the same slope at the point where they kiss. The slope of the indifference curve is the MRS; the slope of the production function is the MPL; so MRS=MPL where they kiss. Two ways of looking at the same equilibrium point.

The way I have drawn the production functions and indifference curves, the labour supply curve shifted left a little bit more than the labour demand curve shifted right. So employment fell a little, and output (and hence income and consumption) increased a lot. (And real wages increased a lot). Historically, over the last 200 years in advanced countries, that is exactly what has happened. It's the "normal" case. We could have chosen to work a lot less and consume only a little bit more, but we didn't. Increased real wages, due to the increased marginal product of labour, gave us sufficient incentive to work only slightly fewer hours.

But it didn't have to happen that way. And it might not always happen that way in future. I could have drawn the curves very differently from the way I drew them.

Go back to the shift in the production function.

Case 1. Suppose the new technology lets us produce 55 apples with the same amount of labour that would have produced 50 before. And 110 where we could have produced 100. And 220 where we could have produced 200. A 10% output increase across the board. That's what I drew (roughly). It means the marginal product of labour increases by 10% everywhere. And the labour demand curve shifts vertically upwards by 10% everywhere. Case 1 is roughly consistent with what has normally happened historically.

Case 2. Suppose the new technology lets us produce an extra 10 apples everywhere. So we produce 60 with the same amount of labour where before we would produce 50. And 110 where we produced 100. And 210 where we produced 200. A 10 apple increase across the board. The production function shifts up parallel. The slope stays the same at any given level of employment. So the MPL doesn't change. So the labour demand curve doesn't shift at all. Good for whoever owns capital, land, or the rights to the new technology. But of no benefit to someone who only gets wage income. Or is it? Yes, it still is. Because people with non-wage income will be richer, and chose to work less, and so labour supply will fall, and so real wages will rise.

Case 3. Someone invents and builds 10 robots, which work exactly like human workers. The production function measured against human+robot labour stays exactly the same. But measured against human labour only the production function shifts left by 10 human workers. And that means the slope of the production function, for any given number of human workers, is flatter than before. The labour demand curve shifts left. Good for whoever owns the robots, and for whoever owns land and capital, but bad for those who only get wage income. Or is it? Yes it is, because it is very unlikely, given historical experience, that the extra income from robots will cause human labour supply to fall by enough to offset the increased labour supply by robots. Real wages will fall.

Comments

[Determinant]

Hmm, stop me if I'm wrong but Case 3 sounds like its close to an "Offshoring" scenario where humans and robots are equivalent and the robots are actually humans who are paid less.

[himaginary]

I suppose that the shift of the indifference curve take some time compared to the shift of the production function in the first diagram. Therefore, economy will temporarily move to the intersecting point of the new production function and the old indifference curve. However, there are two intersecting points. If economy moves to the upper intersecting point, it will experience boom. On the other hand, if economy moves to the lower intersecting point, it will experience depression. In the latter case, the depression seems to occur due to "the Great Vacation" as Krugman put it. So I suppose that this explanation is some simplified version of RBC.

[Too Much Fed]

"An improvement in productivity (in this case) causes an increased demand for labour. That's what a lot of people can't handle. It just sounds wrong. "If productivity increases, you won't need as much labour to produce any given amount of output, so the demand for labour will fall". That's the Lump of Labour Fallacy. Who says output will stay the same?"

It depends, but at first glance and other than cheap oil, I can't think of much that is in short supply. So, you are agreeing that jobs will fall if output doesn't need to be increased?

[Too Much Fed]

Case 2 ... "But of no benefit to someone who only gets wage income. Or is it? Yes, it still is. Because people with non-wage income will be richer, and chose to work less, and so labour supply will fall, and so real wages will rise."

I don't see that happening. The very few are getting richer and working about the same amount and won't retire or are "semi-retired" but not having to sell their assets to finance their "semi-retirement".

[Too Much Fed]

"Who says output will stay the same?"

Do some people believe that real aggregate demand is unlimited?

If some people believe real aggregate demand is unlimited, would they want to minimize the number of retirees (people who would be working less)?

[Too Much Fed]

"When productivity increases, we can: consume the same amount of output and work less; work the same amount and consume more; or any combination of the two. We would even consume a little bit less, and work a lot less, if we wanted. It depends on what we want. It depends on preferences."

What if the very few consume a little more, work about the same amount, and save a lot. They then look for places to invest this savings but only if it will what I like to call "jack up the stock price"? If not, they don't "invest".

[Too Much Fed]

Am I allowed to bring up bernanke's deflation speech?

[Sandwichman]

The paragraph beginning after your second diagram states the assumption, "If the economy is perfectly competitive..." Four paragraphs later, you bring up the Lump-of-Labour Fallacy. By then, I take it you've forgotten YOUR assumption of perfect competition?

If I'm not mistaken, your model also assumes that workers will be hired up to the point where the marginal revenue product of labour equals the wage. But there's yet another assumption (John Bates Clark's) lurking behind that one, which is full employment.

So what you're saying, in effect, is that people are committing a "fallacy" because they are NOT ASSUMING perfect competition and full employment?

[Sandwichman]

But if it is fallacies you want, here's a demonstrated one:

"When productivity increases, we can: consume the same amount of output and work less; work the same amount and consume more; or any combination of the two. We would even consume a little bit less, and work a lot less, if we wanted. It depends on what we want. It depends on preferences."

"We" may indeed be able to collectively choose between consuming more or working less but the canonical income/leisure individual choice model is unsupported by evidence. Pencavel concluded that, considering the consistency with which empirical research produces values that violate the model’s predictions, “the scientific procedure is surely to regard the theory as it has been formulated and applied to date as having been refuted by the evidence” (1986, ‘Labor Supply of Men: A Survey’, in O. Ashenfelter and R. Layard,eds., Handbook of Labor Economics, Amsterdam: North Holland. p.95).

[Sandwichman]

I hate to keep beating on a zombie straw man but the lump-of-labour fallacy claim is 100% bogus -- and pernicious. There are three parts to it: 1. the quaint name, "The Theory of the Lump of Labour", which was coined by David Frederick Schloss in 1891; 2. the disingenuous allegation that unnamed suspects harbour an erroneous belief, theory or assumption "that there is a fixed amount of work to be done", the wording of which hearkens back to an 1871 New York Times report on a strike of engineers in Newcastle, England for the nine-hour day; and 3. the rationale (which is nowadays omitted -- and for good reason). The rationale behind the fallacy claim, which coalesced in the 1830s in the U.K., was that trade unions were secret conspiracies, which sought to maintain a monopoly and tyrannize over employers by imposing an onerous burden of regulations and restrictions on production. (See Alistair Alison's 1838 Edinburgh Review article, "Trades Unions and Strikes").

[Bill Woolsey]

While the homogenous output model provides some insight, I don't think it is all that helpful.

Improved technology increases total output and income. However, a particular change in income can shift the shares of income received by various factor owners. Those owning factors receiving a larger share of a greater income are better off. The result for those owning factors receiving a smaller share of a greater income have an ambiguous result.

Using broad classes of factors, labor saving technology should reduce the share of income going to labor and raise it for other factors. Why? More output is produced and more of the other resources are needed.

Land saving technology (say, energy saving technology) will reduce the share of income going to land, and raise what is going to other resources. Why? Output expands and more of those other resources are needed, and more must be provided to compensate for them.

(Yes, the story about the marginal physical product of labor above, if the marginal physical products of capital and land were explicity treated, describes this more precisely.)

But then there are the income effects. Yes, higher income may raise the demand for leisure and so reduce the supply of labor. But that is just one effect. As income rises, the demand for luxuries rises more than in proportion, the demand for necessities rises less than in proportion, and the demand for inferior goods rises. If the proportion of factors used to produce all of these goods are the same, then this doesn't matter. But if there is a difference, then there will be a shift the demands for various resources, and shifts in income shares for that reason. On the other hand, if services are luxuries and require more labor than other goods, then a growing economy may raise labor's share of income.

[Detlef]

Nick, thanks for your excellent discussion of the Luddite Fallacy. As a non-economist, who worked in the technology industry, may I ask the following questions? (1) What if the robots produce goods (iPods, TVs, cars), which beat human-made goods hands down in terms of quality, reliability etc.? (2) What if the robots produce goods so fast they saturate the market in no time? (3) What if it takes highly skilled labor (toolmakers, chemists, designers etc.) to change the robots so they produce new goods, iPod2 instead of iPod1, say)? (4) How do we modify the economic model, if robot changers are in short supply (2.5 million job openings in the US right now) and therefore receive high wages? (5) What if these robot changers use comparatively little of their large aggregate income for consumption? (6) Where should they invest the remaining income if the industry is skills-constrained? (7) What if the obsolete assembly-line work force migrates to low-productivity jobs (service and non-tradable goods), which disappear when interest rates rise or other shocks strike? (8) Is this a US, a developed-world or a global problem given that, even in China for quality reasons, robots and not human labor produce the high-tech goods? (9) Where does that leave us as long as Asia produces all the robot changers it needs and then some?

[D. I. Harris]

I don't get your point, Sandwichman.

Let's assume you're right about those three things. You haven't actually disproved the fallacy—you've just shown that it's irrelevant. If no one believes there is a "fixed amount of work to be done" then the fallacy is simply harmless. You have not demonstrated that it is pernicious in any way. Yes, perhaps people have used it in the past to keep workers in thrall. But that does not demonstrate that the fallacy is not a fallacy. In fact, most theories can be used to justify discrimination and abuse. Derrida and Foucault designed their theories so that never again could someone else systematically abuse anyone else, but now their theories are used to justify that abuse because there is no overarching metanarrative under which a person's suffering is anything more than that person's chosen narrative, with no more or less value than any other.

We need some way of saying that we can choose between increased output and increased leisure, because different countries have chosen. In the Netherlands, people work an average of 1309 hours a year. In the USA, people work an average of 1777 hours a year (2004 OECD data). That's a big difference. While individuals may not have as much choice (at least, not unless they're either unskilled, and can get a low-paying part-time job, or highly skilled, and can go from contract to contract with a lot of time in-between (and yes, I know people who have done both)), there have been significant choices made in each country.

The US chose increased production; the Netherlands chose increased leisure. That is the choice that recognising the lump of labour fallacy offers us.

[Sandwichman]

D.I. Harris. You're right that I haven't disproved the fallacy. After all, the fallacy is an allegation and -- as Anglo-American jurisprudence acknowledges -- the burden of proof is on those who make the charge. Now, if the fallacy is reduced to the unyielding claim that "there is a fixed amount of work", it would clearly be an erroneous belief. But WHO believes it?

Does Jamie Galbraith advocate early retirement benefits because he is ignorant of basic economic principles and thinks the amount of work is fixed? Yes or No? I ask because an op-ed by Carlos Lozada appeared in the Washington Post on Friday disparaging Jamie's proposal as "a familiar, and questionable, notion on the left." Is Dean Baker also ignorant of basic economic principles? See Dean's Beat the Press post today on "Utopian Thinking on Jobs and Unemployment at the Washington Post".

I also agree that significantly different collective choices have been made in the USA and the Netherlands. That's what I said. That the choice is collective and not individual. The canonical income-leisure model posits that choice as a purely individualistic one. It is not -- at least not without significant sacrifice for those whose choice bucks the policy regime.

[Michael Cain]

How many people actually have a fine-grained choice about the number of hours of work each week? What happens to the model when employment comes with rigid 8-hour shifts and 40-hour weeks built in?

[CBBB]

Society may collectively have a choice between leisure and income but the typical "Representative Agent" does not. The labour-leisure trade-off curve for a typical agent in the economy is more of a step function either they work x or more number of hours a week and receive a salary of y or they work less and receive a salary of zero (they are fired).

[Sandwichman]

Will somebody PLEASE refute Pencavel's observation that “the scientific procedure is surely to regard the theory as it has been formulated and applied to date as having been refuted by the evidence.”

Otherwise, that "labour-leisure trade-off curve" is a zombie. (and we can get back to S.J. Chapman's theory of the hours of labour, which is the REAL neo-classical argument about hours).

[Too Much Fed]

Bill Woolsey said: "Using broad classes of factors, labor saving technology should reduce the share of income going to labor and raise it for other factors. Why? More output is produced and more of the other resources are needed."

What if labor cannot afford or doesn't need to purchase this "more output"?

[Too Much Fed]

Sandwichman said: "Now, if the fallacy is reduced to the unyielding claim that "there is a fixed amount of work", it would clearly be an erroneous belief. But WHO believes it?"

I do in places. Let's say the table market grows 1% a year and its productivity is 3% a year. It seems to me there will be less work in the table market.

[Nick Rowe]

Determinant: I'm not sure. There's a similarity to case 3 if one country with a high capital labour ratio opens for trade with a country with a low K/L ratio. But I don't think it's exactly the same.

himaginary: if prices and wages are perfectly flexible (or if monetary policy accommodates the increased Aggregate Supply by increasing AD) the economy should switch immediately to the new equilibrium. (And RBC theory says it does switch immediately).

Sandwichman:

If I understand you correctly, you are saying that, historically, the people who were accused of the lump of labour fallacy were in fact innocent?

Regardless, I hear the LOL fallacy every year, right here in Canada right now. And it is a fallacy. It's an invalid argument. And the fact that an invalid argument can sometimes have a true conclusion doesn't make it valid.

In the short run, when monetary policy is bad, and the economy is constrained by an excess demand for money and an excess supply of output, then, and only then, will it be true that an across-the board doubling of productivity will cause a halving of the demand for inputs. That's when the labour demand curve will not be the one I have in my model here. It will not be true that firms will demand labour at the point where VMP (or MRP) equals the wage. Because they can't sell the extra output. Even though the unemployed workers want to consume that extra output, and don't want to consume leisure.

And the biggest problem that all Lump of Labour Fallacy proponents have is that they are unable to distinguish between the short-run problem of a monetary exchange economy from the long-run consumption/leisure choice.

In the last 200 years, productivity has increased (say) ten-fold. If the LOL fallacy were correct, we would now have 90% unemployment. Whereas in fact, the unemployment rate shows no secular trend. Instead, GDP increased nearly ten-fold, with a small (voluntary) decline in hours worked. Empirically, the LOL fallacy has failed disasterously. The classical model sketched above has done very well.

My model above is explicitly a *long-run classical* model. It abstracts from the short-run problems that a monetary economy can face.

[Nick Rowe]

Bill: Agreed. "But if there is a difference, then there will be a shift the demands for various resources, and shifts in income shares for that reason. On the other hand, if services are luxuries and require more labor than other goods, then a growing economy may raise labor's share of income."

If I had some reason to believe that luxuries were more (or less) labour intensive, then I think your critique would carry more weight. Otherwise, I would resort to the Principle of Insufficient Reason, and say that since they could be either more or less labour-intensive, we might as well assume they are neither, and so there is nothing to be gained by switching to a multi-good model.

[Nick Rowe]

Detlef: good questions, but hard questions. They all complicate the very simple model here. Each one of those would take me a good hour just to *try* to tackle properly. And a lot of the time my answer would be "It depends on...". So I'm going to skip. Sorry.

Michael Cain: "How many people actually have a fine-grained choice about the number of hours of work each week? What happens to the model when employment comes with rigid 8-hour shifts and 40-hour weeks built in?"

Let's just assume that there is no way that an employer can accommodate each individual's preferences. Assume we all have to work the same number of hours. Because there's a production line.

Suppose we all work an 8 hour day. Then, suddenly, the majority of workers (or the average worker) decide they want a 7 hour day. They value the extra leisure more than the lost consumption.

The individual employer who switches to a 7 hour shift would be able to hire workers at much lower pay than other employers. So he would make higher profits. So the rest follow to a 7 hour shift. The one's that don't have higher costs, and go bust.

TMF: "What if labor cannot afford or doesn't need to purchase this "more output"?"

In aggregate, we can always afford to buy the goods we produce. Because our income equals the value of the goods we produce. That is the underlying kernel of truth in Say's Law (which is otherwise false, in a monetary exchange economy, because we sometimes choose to hoard our income in money, rather than spend it).

If we don't *want* to purchase the extra output, we choose leisure instead. Double productivity. Suppose people don't want to consume any more than they have now. They are satiated. So they choose to work only half as much.

That's what those indifference curves are telling you, if you would only take the time to study Intro Economics, which is the pre-requisite for this post!

[CBBB]

I think part of the misunderstanding here is Nick keeps saying "we CHOOSE leisure", which isn't quite true.

Suppose there's a factory producing sports cars which sees it's productivity double due to some improvements in automation technology.
But suppose no one is interested in buying more sports cars. Then half the workers in the factory are laid off. I would not say that those workers chose leisure as much as it was forced upon them.

[Nick Rowe]

CBBB: That's a partial equilibrium (microeconomic) thought experiment. Now lets do macro. Repeat the same thought-experiment over the whole economy. Suppose *all* the factories are producing goods ABCD, but *everybody* (and that includes the workers) only want to buy goods WXYZ.

The factories won't be able to sell goods ABCD. But, *at the same time*, the workers won't want to work for wages that can only be used to buy ABCD. The supply of labour falls. There is no excess supply of labour.

In this sort of classical model, the demand for goods is just the flip-side of the supply of labour.

(Does the "flip-side" metaphor still work today, or has everyone forgotten what a flip-side is?)

The Lump of Labour Fallacy, by the way, is an example of a fallacy of composition. It tries to reason from a partial equilibrium to a general equilibrium case.

[Sandwichman]

Nick,

Yes, historically people accused of a lump-of-labor fallacy were innocent. To give you one historical example: Jamie Galbraith, accused by Carlos Lozada today in the Washington Post. I'm not saying that nobody has ever assumed a lump of labor. What I'm saying is that the claim is made as a sweeping generalization, i.e., EVERYBODY who advocates work-sharing NECESSARILY commits the fallacy.

But I'm saying something I think is more fundamental than that. There is no single canonical version of the fallacy claim and the various versions extant contradict one another.

You say you hear the lump of labour "every year, right here in Canada right now." Which version of the claim are you referring to? D.F. Schloss's? Jennifer Hunt's? Richard Layard's? Raymond Bye's? Paul Samuelson's? John Rae's? David Parry's? Charles Buxton Going's? Clyde Dankert's? Besides being mutually contradictory, the various versions' demonstrations are ad hoc and ad lib. Some of them are even internally contradictory. I'm not making this up. It's documented, peer reviewed and published.

So my question again is which version of the fallacy do you hear right here in Canada, right now?

[CBBB]

Yes but the Lump of Labour Fallacy is only a fallacy in the long-run. I understand that, but it's the short run that matters to most people and the long run that only matters to economists. What do I care if increased productivity means the next generation can afford to buy more smart phones or whatever if I can't get a job TODAY?

Besides, in my sport car example I didn't say there was no demand for sports cars, just no demand for the extra sports cars produced by rising productivity.
So in your example the economy produces ABCD and there is demand for products ABCD. Then, rising productivity causes more production of ABCD but everyone is completely satisfied with previous amounts of ABCD. Labour supply won't fall because the workers still want the previous amount of ABCD, but demand for labour will fall - the great forced vacation.
Sure it's a partial equilibrium; maybe the prices of ABCD will decrease causing demand to raise or tastes will change, or new kinds of goods will be produced but this is all in the long-run.

[CBBB]

I agree with Sandwichman, the lump of labour accusation and the devotion to focusing on long-run outcomes is often used as a way to argue against taking any action to alleviate unemployment or underemployment.

[Sandwichman]

The lump-of-labour fallacy, Luddite fallacy and Mercantilist fallacy are 'cousins,' so to speak. They all reflect an over-extension of what starts out as a worthwhile, counter-intuitive observation about economics. In his new book, The Globalization Paradox: Democracy and the Future of the World Economy, Dani Rodrik performs a masterful take down of Mercantilist fallacy overkill.

"Such fallacies tend to make economists impatient with objections to free trade and dismissive of those who would want to interfere with it. It is easy to pooh-pooh many anti-trade arguments because they make little sense upon scrutiny..." But "Could it be that ordinary people have a better intuitive sense of the complexity of the case for free trade than we give them credit for? In fact, powerful and elegant as it may be, the argument presented by Henry Martyn, David Ricardo, and the others is not the whole story."

When Rodrik tells "the whole story," beginning at the bottom of page 52, the benefits of free trade no longer appear so inevitable, impeccable and universal.

[Nick Rowe]

Sandwichman: My God! I get the impression I am talking to someone who has made his life's mission the study of the Lump of Labour fallacy!!

"Do you mean the African swallow or the European swallow?"

The version of the LoL fallacy I hear is this: "Productivity doubles, therefore the demand for labour halves, because we only need half the workers to produce the same level of output".

CBBB: If the problem is a short-run deficiency in aggregate demand, which must be due to an excess demand for money, then the cure is to be found in monetary policy. Policies such as job-sharing, forced early retirement, etc., based on the LoL fallacy, are as misguided as the fallacy on which they are based.

In your example, labour supply will fall, because now that productivity has doubled they will only want to work half the time to buy all the sports cars they want.

(It's hard for me to imagine that people could *ever* have as many sports cars as they want, but I expect some people could).

[CBBB]

People generally can't decide to work half as much time! Again, the switch between leisure and work is a long-run, or at best medium-run occurrence and it is one that takes place on a societal level. If you want to model the leisure-labour trade-off of the average person you should use Heaviside functions.

If you economists want to assume full employment and perfect competition I can assume saturation of the sports car market.
Again, job-sharing or forced retirement are not policies based on the Lump of Labour fallacy. In the short run there can be a lump of labour. These are policies designed to get people back to work in decent jobs related to their skills.
Because of the disastrous consequences that being unemployed, even for just a few months, can have on a person's entire life, maintaining high level of employment should be the foremost goal of public policy.

[Sandwichman]

Nick,

Quite the contrary, I would pay to be rid of the damn thing! Just taking your example, though, the demand for labour halving as a result of a doubling of productivity is one possible, albeit highly unlikely outcome. Other outcomes could be the demand for labour drops but not as drastically as by 50%; the demand for labour stays the same as the result of lower prices, expanded consumption, etc.; or the demand for labour increases due to lower prices, expanded consumption, economies of scale leading to even lower prices etc.

To say that the demand for labour MAY drop by 50%, though perhaps a simplistic miscalculation, is not a thereby a fallacy. To say that demand for labour MUST drop by 50% would be a fallacy -- as it would also be a fallacy to say that demand for labour MUST NECESSARILY remain the same or increase.

Here's my point: a trained economist needs to be at least as rigorous in the treatment of assumptions and the qualification of likely or possible outcomes as the "rude populist" arguments he or she dismisses disdainfully.

But you have been a most courteous host for this discussion and I don't want to wear out your hospitality. So I'll email you copies of my papers and say no more on the topic in this thread.

[Sandwichman]

My apologies for the unclosed italics in the above post.

[Sandwichman]

test.

[Determinant]

Nick wrote:

"In the short run, when monetary policy is bad, and the economy is constrained by an excess demand for money and an excess supply of output, then, and only then, will it be true that an across-the board doubling of productivity will cause a halving of the demand for inputs. That's when the labour demand curve will not be the one I have in my model here. It will not be true that firms will demand labour at the point where VMP (or MRP) equals the wage. Because they can't sell the extra output. Even though the unemployed workers want to consume that extra output, and don't want to consume leisure."

Again putting on my devil's horns, that seems to accurately describe the awful reality that the United States in particular and the world in general has faced since 2008. Furthermore by "bad monetary policy" I would include retail banks hobbled by bad loans and the financial sector generally impaired by a credit crisis. When the policy maker (Central Bank) relies on the financial sector to implement its policies and that sector can't deliver, the general economy still sees bad monetary policy notwithstanding the Central Banks intentions.

Secondly, when posters argue about "Short Term" and "Long Term" it reminds me of my signals analysis classes. Any second order (resistor/inductor/capacitor) system will have a signal response with two components, the transitory response which fades to zero with time and the forced response which results from the signal input.

It seems to me that some economists want to only look at the limit t->infinity where the forced response is the only one that matters. Others say that the transitory response is the one that matters. I say both matter and it depends on the time frame you want to look at. Whenever we get into these debates one of the subtle sticking points is what constitutes "practical infinity" which determines what components of a problem can be neglected when examining the limit at infinity.

Keynes' famous quote "In the long run we are all dead" is aimed squarely at this problem.

[Nick Rowe]

Sandwichman: it's good to have you here. Even if you do seem to be fixated on one topic, ;-) it is a topic directly related to this post. And an important one.

Now, this is where I want to take issue with you: "...or the demand for labour increases due to lower prices, expanded consumption, economies of scale leading to even lower prices etc."

This is where I think you are using (implicitly) partial equilibrium reasoning to tackle a general equilibrium (macro) question. I suspect(?) you are reasoning something like this: 'If an increase in productivity lowers the price of the good, and if demand is sufficiently elastic, then it is possible that quantity demanded will increase by more than enough to offset the increase in productivity, so that demand for labour actually increases.'

Is my hunch correct?

Because I need to tackle this question. Right now I'm too tired, and can't think of the clearest way to make the distinction between partial and macro reasoning. But I want to do a post on this some time, when i can think of the clearest way to express myself.

[Sandwichman]

Yes, I would agree your hunch is correct that I'm implicitly using partial equilibrium reasoning there and an assumption of sufficiently elastic demand.

I'm not sure that I would identify macro reasoning with general equilibrium, though. I come at it from an accounting/social-accounting perspective. The big pitfall in social accounting is the tendency to double count transactions that occur between the separate accounting units. Equilibrium in the accounts is a constructed artifact, though, rather than a posited natural process.

Here's where the double-entry magic of traditional bookkeeping fails social accounting: in terms of equilibrium, everything's fine as long as you consistently make the same category error on both sides of the ledger. And that's easy to do, particularly in areas where "outputs" are implied from expenditures (which is to say government activities).

[Artturi Björk]

"Case 3. Someone invents and builds 10 robots, which work exactly like human workers. The production function measured against human+robot labour stays exactly the same. But measured against human labour only the production function shifts left by 10 human workers. And that means the slope of the production function, for any given number of human workers, is flatter than before. The labour demand curve shifts left. Good for whoever owns the robots, and for whoever owns land and capital, but bad for those who only get wage income. Or is it? Yes it is, because it is very unlikely, given historical experience, that the extra income from robots will cause human labour supply to fall by enough to offset the increased labour supply by robots. Real wages will fall."

Robots might shift the labour demand curve or this could also be interpreted as a change in the production function. (Markets get bigger, more connections, more available culture etc. just like with population growth.)

[Bob Smith]

Sandwichman: "D.I. Harris. You're right that I haven't disproved the fallacy. After all, the fallacy is an allegation and -- as Anglo-American jurisprudence acknowledges -- the burden of proof is on those who make the charge."

Three Points:

(1) We aren't in a courtroom, so the musings of "anglo-American jurisprudence" aren't all that helpful.

(2) Under anglo-American juriprudence, the CIVIL burden of proof on the plaintiff is that they must establish their case on the balance of probability (i.e., 50%+1). So if someone puts forward a reasonable basis for asserting that the lump of labour theory is a fallacious, and no rebuttable is provided by the defendent, the plaintiff wins. Even if the defendent does try to rebutt the argument, as long as the plantiffs assertions are, on balance, better supported, they win. The burden of proof, in that context, is a tactical one (i.e., the plaintiff has to put forward something to be able to win), but in practice not a meaningful one.

(3) Different legal regimes have different evidentiary burdens. In theory, in the inquisitorial system that much of the world's criminal justice systems use, the burden of proof is on the defendent since those regimes typically proceed on the basis that, if there's sufficient evidence to go to trial, there's sufficient evidence to convict unless the accused can provide some reason not to do so (whether, in practice there is a difference is debatable, since in the Anglo-America regimes most criminal cases are either dismissed or plead out before they go to trial if the evidence to support a conviction isn't there). Does the burden of proving the falsehood/truth of the lump of labour theory depend on where we're posting from?

[Sandwichman]

Bob Smith,

But the "Lump of Labour Theory" IS fallacious on two grounds:

1. there is NOT a fixed amount of work.
2. it is attributed to people who don't subscribe to it.

Besides, as you yourself acknowledge, we aren't in a courtroom, so all your casuistry about civil jurisprudence and different legal regimes is moot.

[Too Much Fed]

Nick's post said: "TMF: "What if labor cannot afford or doesn't need to purchase this "more output"?"

In aggregate, we can always afford to buy the goods we produce. Because our income equals the value of the goods we produce. That is the underlying kernel of truth in Say's Law (which is otherwise false, in a monetary exchange economy, because we sometimes choose to hoard our income in money, rather than spend it).

If we don't *want* to purchase the extra output, we choose leisure instead. Double productivity. Suppose people don't want to consume any more than they have now. They are satiated. So they choose to work only half as much.

That's what those indifference curves are telling you, if you would only take the time to study Intro Economics, which is the pre-requisite for this post!"

Nope. We're back to the same issue(s), wealth/income inequality and too much currency denominated debt. I believe RSJ is on a similar track.

If people go thru the budgets and accounting of the major economic entities of the economy, I believe they (or at least some) will find the hole(s) in macroeconomics (the in aggregate).

Explain Warren Buffett to me. How much leisure has he accumulated? Is he spending down his assets? Is he working any different than 20 or 30 years ago?