Lump Of Labor Fallacy

While it is not a prerequisite - information from the following article will be useful to more fully grasp the concepts here: Paradox of Thrift, Fallacy of Composition, Austerity, and Second-Order Thinking

Note: As always, economies are hard to 100% accurately predict when including every possible disaster or wild situation. Here we will focus on one variable, in isolation, that has an effect on employment, but its a massive one. This outlines the pattern and relationship in the majority of cases. There is always nuance, especially in the short term, especially in times of recession or depression.

Where do jobs come from?

Job growth primarily stems from an increase in demand for goods and services, although factors like innovation and investment also contribute.

When considering the impact of someone new entering the workforce who was previously not working, demand becomes the key variable to examine, as innovation and investment are less directly relevant in this context.

How does demand increase jobs?

Job growth is driven by rising demand, as businesses respond by hiring more workers to meet the needs of consumers. This creates a ripple effect, generating additional jobs across various sectors—a phenomenon known as an economic multiplier.

Effect of adding additional labor

When thinking of a new participant entering the workforce, it can feel correct to assume that if this person gets a job, someone else must miss out on a chance to secure employment.

However, this assumption relies on the flawed idea that the number of jobs in the economy is fixed - a notion known as the lump of labor fallacy. In reality, adding new workers to the economy inevitably increases the overall need for workers, as their employment drives further demand and job creation.

How could this possibly be?

Through a few primary mechanisms:

1. Laborers spend their earnings
   • Once someone is employed for the first time in an economy, they have significantly more money to spend. This increases demand in many sectors such as food, housing, transportation, etc.
   • Local economies typically benefit from this increased demand, as much of the spending stays local - restaurants, bars, shops, utilities, etc.
2. Economic multiplier
   • This spending does not stop with its initial use. Each time money changes hands, it fuels new demand, creating jobs in that sector. This cycle amplifies with each repetition, creating a cascading effect that multiplies its impact across the economy.
3. Indirect productivity gains
   • A new laborer can allow a business to expand its operations to serve more customers. When this happens, the business needs to purchase more supplies, increasing demand for those supplies — which, in turn, drives job creation in supply chains and related industries.
   • Similarly, a specialized laborer entering a labor-constrained industry, such as healthcare, increases the capacity to serve more people. This expanded service availability leads to higher demand for medical supplies, equipment, and support services, further fueling job growth.
4. Longer term / higher level effects
   • Increased employment leads to overall consumer confidence, spurring increased demand.
   • Over time, their contributions may lead to investments in infrastructure, new technologies, or workforce training, all of which further increase demand.
     • For example, as new laborers contribute to business expansion in a specific area, the resulting economic growth may lead to road upgrades or improved traffic systems to accommodate the increased activity.

This is to say, the so-called economic pie is not one size with everyone trying to get a slice - the pie itself grows as more people go to grab a slice.

For a very simple example - imagine a young worker about to enter the workforce for the first time. This worker is 21 and has been living at home with no or very limited income to themselves their whole life so far. In this case, the worker is joining a construction crew - primarily helping to fix, lets say, pipes under the streets in NYC. The location itself does not matter, but I will include these details to give you a geographical reference point and to give it the sense of being more visually real.

This worker, upon accepting the new job, does a few things:

• Moves to a new location closer to the job site
  • The local community that this person moves to, now benefits from this workers spending due to their new income.
• Buys new clothes for work
  • Including specialized work boots.
• Sets up their new place
  • Purchases new or used dishes, furniture, TV, etc from local stores and/or online

While working, this worker:

• Freed up the time of another worker who had been there longer and was more experienced
  • This allows this other worker to focus on things that more experienced workers can
  • The efficiency of the group increases, allowing the business to complete more jobs per year. In turn, they used the additional revenue to hire another person just like this worker in the upcoming year.
• Consumption near the job site
  • 2 days of the week, the crew gets lunch out together at a local spot near the job site.
  • 1 day a week, the crew grabs drinks after work at a bar near the train station that folks take to go back home.

While off work, this worker:

• Has income to spend
  • Every weekend they go out with their friends and go out to the bar or clubs in the city.
  • This person now can visit restaurants on their time off for dinners or lunch on the weekend.
  • Can buy more and nicer things to improve their life.

Just from this one new entry into the labor force, in this one job, you can see clearly how demand is increasing in almost every sector, especially when you extrapolate each of the above points.

And so, it is not correct to assume that for one worker to win (get a job) others must miss out on employment. The economy does not have a fixed number of jobs; it is dynamic and increases when productivity and demand grow driven by these new laborers.

🍐 By the way, this can work in reverse — so if you take people out of the workforce it reduces demand and can kill jobs for other people.

Some other great articles that touch on The Lump of Labor Fallacy:

• Lump of Labor Fallacy: Definition and How It Works
• The Lump of Labor Fallacy
• Countering the “Lump of Labor” Fallacy: Two Lessons