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

Thank You For 40k, Bluesky

Thank you everyone on Bluesky for 40,000+ followers!

I’ve been really grateful to find such a great community here and so many that have been supportive of my content here on my website. Finding great people and getting suppor has been far easier here than any other social network I have ever been on.

If you haven’t already - definitely start an account on Bluesky. It’s growing a lot and a lot of great voices are on there. The more folks on it, versus billionaire owned networks - the better off we will be.

Check out my collection of great starter packs that I have put together, if you are interested!

Bluesky Starter Packs

What Are Externalities?

This post is meant to give you a basic understanding of what externalities are, some examples of them, and an introduction on why they matter and need correction. Here we are particularly focused on negative externalities - since these are both more common and from a policy perspective, far more important.

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

When someone makes a purchase, or a trade - it seems to be clear, at first, what the costs are and who is getting what. Entity A gets X and Entity Y gets B. Simple enough, right?

Intuitively - it is clear to see these direct costs to each party:

The Seller

• Cost of producing that good (including labor, materials, marketing, etc).

The Buyer

• Cost is the money they spent to purchase the good or service.

Enter, externalities.

The above costs are the only ones taken into account in the private transaction - however there are other costs associated with the transaction - almost all of them are costs to society as a whole or other groups of individuals.

Examples

Some examples of negative externalities.

1. Alcohol sales

   The cost of a beer, for example, is relatively straightforward. You pay some small amount of $ for a beer, and they give you the beer.

   However, there are a few second order effects of selling and consumption of alcohol on society:

   • Public Disorder
     • Bars can become rowdy, fights occur, public places become overly noisy, people commit more crime when drunk in general, etc.
     • Our tax money must be used to address these issues - such as police having to respond to a fight in a bar.
   • Health Costs
     • There are many health implications of drinking alcohol that cost a lot to treat.
     • The more money spent on this, the higher insurance rates go for others. Additionally, the more effort spent on these issues - the less healthcare workers can solve other health issues or do research.
   • Drunk Driving Accidents
     • Drunk driving kills, on average, 11,000 people a year (average of 2013 - 2022). This is one person every 39 minutes. (Source)
     • Not to mention, all of the costs for treatment of non-fatal crashes.
   • Productivity Loss
     • The overall economy loses productivity because of alcohol for a few reasons:
       • Alcohol related deaths reduce the amount of people in the labor force who can produce goods and services, as do major injuries tied to alcohol.
       • Hangovers and missing work or reduced productivity at work, as well.
       • Excessive drinking, in 2010 (most recent data available) cost the economy around $249 billion dollars. (Source)

2. Traffic Congestion

   Consider an area where the traffic is immense, during specific times or otherwise. Traffic jams are common in this situation, and people tend to be stuck in these jams.

   • Productivity Loss
     • If people are late to work and miss some work - they are less productive by definition.
   • Fuel Consumption Rises
     • Increasing pollution (not just climate change concerns, but burning fuel gives people diseases due to airborne pollutant)
       • These include high rates of lung cancer, asthma and respiratory issues, heart diseases, and neurological disorders. These take a huge toll on people and the economy.
     • There is more demand for fuel - and therefore gas prices rise.
   • More Accidents
     • Stop and go traffic increases the rates of accidents especially rear end collisions.
     • Tax payers fund emergency services, insurance premiums rise, and the traffic jams worsen when there are accidents.

3. Social Media Applications

   Social media companies design their platforms to maximize user engagement through notifications, algorithms, and addictive content loops. Billions of people spend large portions of their lives scrolling on social media - users get social media and the companies get money from ads and the user’s data.

   • Mental Health Issues
     • Increased anxiety, depression, and social comparison. The costs of therapy, medication, and reduced productivity are borne by individuals, employers, and public healthcare systems.
     • Suicides due to social media are common.
   • Spread of Misinformation
     • False or harmful information spreads rapidly, affecting public discourse and leading to societal costs like political polarization and public confusion.
     • Misinformation has caused many deaths, as well.
   • Productivity Loss
     • Excessive screen time affects workplace performance, increasing indirect costs for businesses and government.

You can see, there are a lot of very very bad second order effects to lots of types of commerce. Some of these have some taxation attached to help offset the societal issues they cause - but often it’s too low - and most of these have nothing to offset them at all.

There are so many examples of negative externalities, but I won’t go on and on.

Why Is This Important?

In many, many cases - corporations make enormous profits while the individuals in society pay the costs in both direct and indirect ways - externalities. All of us are paying extraordinarily, while millionaires and billionaires laugh at us on their pile of cash.

Is this theft?

Duh!

There's a Storm Coming...

From The Dark Knight Rises:

Selina Kyle (Catwoman): There’s a storm coming, Mr. Wayne. You and your friends better batten down the hatches, because when it hits, you’re all gonna wonder how you ever thought you could live so large and leave so little for the rest of us.

Bruce Wayne: You sound like you’re looking forward to it.

Selina Kyle: I’m adaptable.