Friday, April 22, 2016

Worstall's Malignant Lump

In an op-ed at the New York Times yesterday, Nick Hanauer and Robert Reich made the following observation:
In a cruel twist, the longer and harder we work for the same wage, the fewer jobs there are for others, the higher unemployment goes and the more we weaken our own bargaining power. That helps explain why over the last 30 years, corporate profits have doubled from about 6 percent of gross domestic product to about 12 percent, while wages have fallen by almost exactly the same amount.
According to Tim Worstall, Hanauer and Reich committed a lump-of-labor fallacy. Worstall objected specifically to their claim that raising the income cap for the overtime premium would force employers to either pay higher wages or hire more workers. Worstall's objection is that the employer's demand for labor will not remain the same if the cost of that labor goes up.

To be precise, Worstall's assertion is one version of the fallacy claim complex. It happens to be the version refuted by Maurice Dobb in 1929. As Dobb pointed out, workers are concerned with how much compensation they receive in return for the amount of effort required of them and not simply in the aggregate amount of employment in the economy. Working longer hours for less pay is not a bonanza for the workers even if it does lead to more aggregate hours worked in the economy as a whole.

 But again, Worstall's fallacy claim is but one version of a complex of claims, some of which contradict each other. I addressed this perplexing proliferation of claims in my contribution to Working Time: International trends, theory and policy perspectives. Refute one of the bogus fallacy claims and a substitute will immediately pop-up to take its place!

It is not easy to unpack what is going on inside the fallacy claim because its persuasive strategy is based on a "house of mirrors" effect. Whether disingenuously or unwittingly, fallacy claimants commit yet another version of the fallacy they attribute to others. Their error, though, is embedded in the perfect competition, perfect information, full employment, ceteris paribus abstractions of the standard equilibrium model of supply and demand. The name given to this set of abstractions by those who mistake them for a description of reality is "economics." When "economists" commit this vulgar error it is regarded by Worstall & Co. as an infallible maxim.

Now, it is conceivable that some of those accused of committing the lump-of-labor fallacy may indeed assume the proverbial "fixed amount of work to be done" or whatever. There can be bad arguments for a good cause. But, as A.C. Pigou pointed out in his refutation of the ubiquitous fallacy claim, "If it were a good ground for rejecting an opinion that many persons entertain it for bad reasons, there would, alas, be few current beliefs left standing!"


ProGrowthLiberal said...

Worstall dares claim that he is on the same page as Paul Krugman on economics? Maybe it is time for Krugman to finally link to one of your posts. Well done!

Sandwichman said...

"Worstall dares claim that he is on the same page as Paul Krugman on economics?"

With regard to the lump-of-labor fallacy claim, he has a point. Krugman built a book around it -- The Accidental Theorist. It has been almost five years now since I sent my Open Letter to Paul Krugman.

Tim Worstall said...

Tom, that's all great, but the point you address is about the supply of labour. I don't see anything at all which you've said which refutes my point about the demand for it.

Could you be specific and point to the error in "wages rise, demand for labour changes"?

Sandwichman said...


I don't object to "wages rise, demand for labour changes" although exactly how much and in what direction that change takes place depends crucially on other factors and initial conditions. What I pointed out was Maurice Dobb's observation that workers would be more concerned with compensation for effort than with aggregate employment and earnings. Dobb's refutation of the "fixed Work-fund fallacy" (Alfred Marshall's term for the lump of labor) is work quoting in full:

"When in reply to the economists' theory that wages were inexorably determined by supply and demand, the trade unionists of the middle nineteenth century declared that they would influence wages by limiting the supply of labour through restrictions on working overtime etc., the economists retorted by accusing them of harbouring a fallacious "Work-Fund" doctrine—of thinking that by limiting the work done by each more employment could be created for others. The retort partly missed the point of the argument in so far as the trade unionists were trying to raise the supply-price of their labour by limiting its amount. But at the same time the economists' ignoratio elenchi contained a point of its own that was important. What they intended to say was that a restriction on the supply of labour could not increase aggregate earnings, and, unless it took the form of restriction of the numbers of the working population, could not increase aggregate earnings per head. This follows if the demand for labour, or the Wages-Fund, is elastic—if it is larger when there is more profit to be made than when there is less. Such restriction can, however, increase wages in proportion to the worker's expenditure of energy and his "wear and tear," and it can increase Relative Wages, or wages as a proportion of the total social income.

"The same applies to modern trade union methods of collective bargaining, which aim, not primarily at restricting the supply of labour, but at raising the supply-price of labour and setting a minimum below which labour cannot be purchased. Such action has quite a wide power of influencing the rate of wages that is paid in proportion to the amount of work that is done, and so of increasing welfare. But, while it can do this, it is unlikely to add to aggregate earnings; and if trade union action goes beyond the attempt to raise the wages of particular grades or particularly exploited groups in special circumstances, it is likely to result in unemployment. What was implied in the economists' retort to the advocates of the so-called Work-Fund leads to the apparent paradox that the more the workers allow themselves to be exploited, the more their aggregate earnings will increase (at least in the long run), even if the result is for the earnings of the propertied class to increase still faster. And on this base is erected a doctrine of social harmony between the classes. But it does not follow that the workers will prefer to be exploited to a maximum degree, or that attempts to limit this exploitation are based on fallacious reasoning. And if in raising the supply-price of their labour the choice lies between restricting the number of men employed or of restricting the amount of work done by each man, the latter seems clearly the preferable alternative."

Sandwichman said...

"work quoting in full" should be worth quoting in full.

Denis Drew said...

First thought, there is a limited amount of labor that labor is capable of performing – starting out with all day exhaustion in more primitive industrial or agricultural economies (but not in primitive hunter-gather groups) and proceeding to how much labor is willing to work for X amount of remuneration when bare survival is no longer at stake.

In this light we could all pay each other more if we all worked more hours individually or if more individuals worked hours (we’ll get to that). Culture can be the sole arbiter of how much we are willing to work for X – meaning the amount is voluntarily set by ourselves. This is more likely in a (truly) free labor market (France) where labor is capable of withholding its input to bargain (collectively).

Less likely in a (truly) unfree labor market like the US economy where collective bargaining power is a thing of the past. Here labor will work more hours for less – sort of cutting the cultural limit in the middle.

Free or unfree, labor’s willingness to put in hours for X is set mostly by culture – which pretty much means whether labor is from a rich or poor country. This latter can lead to a labor supply anomaly when rich and pour country labor is mixed together in the same economy.

American labor force is 150 million. We have 40 million immigrants – let’s say half work. 20 million willing to work-for-less have a deep impact on the pay prospects of the 75 million in the bottom half of labor income – make that closer to 55 million native born.

More especially in an unfree labor market.

In Chicago anyway, low wage jobs belong to immigrants. Don’t just think McDonald’s, think American taxi drivers – that’s me. We are not willing to put in 60 grueling hours for $400-500 a week (my best – my guess at best) for what used to pay $800-900. We’ve dropped out.

More systemically, 100,000 out of (my guesstimate) 200,000 Chicago gang age, minority males are in street gangs. If supermarkets paid $800 a week instead of $400, I’m pretty sure they’d all be stacking shelves instead of shooting it up over territory.

Anyway, there is a lump of labor’s ability – and willingness – to work. FWIW.

Denis Drew said...

ALLOW ME to post a little note to Tim here -- as I can't seem to post a comment to him at Forbes. :-)

If a minimum wage hike is priced right it will bring in more dollars for fewer hours of work -- but the employment picture doesn't end there. The extra dollars will be diverted from purchases higher wage folks would have made to buying decisions lower wage people make.

If lower wage people make exactly the same buying decisions as higher, then, the effect on employment will be null (it's a little trickier, but that's the idea). The difference will be in consumption: the lower wage will consume more and the upper less (that's the idea).

In practice, consumers tend to aim their purchases somewhat more towards vendors who hire in the same pay spectrum. Poor people buy other poor people's second-hand cars -- used car lot too pricey. Middle wage people buy off the used car lot. Higher wages put you in the showroom.

Upshot, a higher minimum wage – if priced right – should predict a few more customers at Mickey D’s and a few less at Olive Garden. Likely that’s what we saw in Card and Krueger (1992) -- studying firms with “giant” 33% labor costs no less.

Sandwichman said...

“Anyway, there is a lump of labor’s ability – and willingness – to work.”

Indeed, Denis. One thing that has always puzzled me about the l-o-l taunt is that it sometimes claims demand is “unlimited” and at other times claims that demand is hair-trigger sensitive to price changes.

There IS a fixed lump of potential labor supply, which is the number of potential workers times the number of hours each of them can work before exhaustion makes them unproductive.

Let’s say there is a population of 100 potential workers and 50 hours a week is the absolute maximum each can work without impairing their capacity to come back and work as productively the next week. The lump of labor supply is thus 5000 hours per week. At that maximum, there can be no demand for labor greater than 5000 hours per week because a higher price can not call forth more labor supply — just a higher price for that given supply. Inflation!

Curiously, lump-of-labor scolds are often the same folks who sound alarms about the threat of inflation from deficit spending. What are they afraid of? Isn’t there an “unlimited amount of work to be done”? Or does that assertion only apply when it supports their arguments and not when it contradicts them?

Again, I would call attention to the several versions of the fallacy claim, which just happen to occupy all the points on the compass! Demand for labor is EITHER hair-trigger sensitive to price changes OR unlimited, independently of limits on the supply of labor OR instantaneously responsive to increases in the supply of labor.

I imagine the lump must also take ink transfers from newspaper comic strips.

Magpie said...

But again, Worstall's fallacy claim is but one version of a complex of claims, some of which contradict each other.

I think Matt Bruenig has identified a similar pattern. He calls it

Capitalism Whack-A-Mole