The paradox of toil is the economic hypothesis that, under certain conditions, total employment will shrink if there is an increased desire among the population to take on paid work. According to the macroeconomist
Gauti Eggertsson, this occurs when "the short-term nominal interest rate is zero and there are
deflationary pressures and output contraction".
[
] When wages are pushed down by the simultaneous efforts of everyone in the labor force to work more even at lower wages, with interest rates against the
zero bound
0 (zero) is a number representing an empty quantity. In place-value notation such as the Hindu–Arabic numeral system, 0 also serves as a placeholder numerical digit, which works by Multiplication, multiplying digits to the left of 0 by th ...
, demand must fall because the only source of added demand would be added credit to compensate for those lower wages, credit which cannot be made available on any looser terms; this loss of demand from lower wages leads to a loss of jobs. The belief that there must necessarily be more work available if wages drop is an example of the
fallacy of composition
The fallacy of composition is an informal fallacy that arises when one infers that something is true of the whole from the fact that it is true of some part of the whole. A trivial example might be: "This tire is made of rubber, therefore the ve ...
.
[
The paradox of toil was proposed by Gauti Eggertsson in 2009.][
] The term was coined to parallel the " paradox of thrift", a concept resurrected by John Maynard Keynes
John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...
and popularized under that name by Paul Samuelson.
Debate
Casey Mulligan argued against this effect, proposing several natural tests, among them:
* seasonal fluctuations in the job market in 2009;
* the increase in the U.S. minimum wage in 2009.
These, he said, failed to demonstrate the paradoxical effects.[
]
Eggertsson responded that seasonal labor supply variations, being relatively predictable, would have negligible effect on nominal short-term interest rates; and that an increase in the minimum wage affected only aggregate employment, with paradox of toil saying nothing about composition.[
]
Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was th ...
and Eggertsson have since proposed that the paradox of toil and the paradox of flexibility The paradox of flexibility is that a debt deflation shock can create a situation where increased price and wage flexibility results in decreased total demand. This term was introduced by economists Paul Krugman and Gauti Eggertsson in the paper ' ...
mean that wage and price flexibility do not facilitate recovery from recessions during a liquidity trap
A liquidity trap is a situation, described in Keynesian economics, in which, "after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers holding cash rathe ...
, but actually exacerbate them.
Influence
The reasoning behind the paradox of toil, together with the paradox of flexibility The paradox of flexibility is that a debt deflation shock can create a situation where increased price and wage flexibility results in decreased total demand. This term was introduced by economists Paul Krugman and Gauti Eggertsson in the paper ' ...
, has led to speculation that there might be a "paradox of innovation" by which greater labor productivity or cheaper products reduces demand for labor, which reduces wages, and therefore reduces demand overall.
See also
* Baumol's cost disease
Baumol's cost disease, also known as the Baumol effect, is the rise of wages in jobs that have experienced little or no increase in labor productivity, in response to rising salaries in other jobs that have experienced higher productivity growth ...
Notes
External links
"Double, double, toil and trouble: the paradox of toil"
The Economist
''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Econo ...
: Free Exchange, 2 May 2010
The paradox of toil
Money Supply, Financial Times
The ''Financial Times'' (''FT'') is a British daily newspaper printed in broadsheet and published digitally that focuses on business and economic current affairs. Based in London, England, the paper is owned by a Japanese holding company, Nik ...
, 15 December 2009
"Up is down"
The Economist
''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Econo ...
: Free Exchange, 14 December 2009
{{DEFAULTSORT:Paradox Of Toil
Keynesian economics
Paradoxes in economics
Labour economics