Lump of Labor… and other items in Labor Economics
“Ours is a laboristic rather than
A capitalistic society...” Sumner Slichter

Continuing in our Keynesianism refresher series, we now look at labor through the economic lens. Unless we are either hoboes or the idle rich, work is a primary activity for all society. Whether we labor at supervision or the hardest manual work, 80% of national income is derived from work. The “economic problem” as it applies to labor concerns, who will do what tasks, how they will do them, how much they will be paid, and under what rules.
Labor is not the typical good or service that we think of in economic terms, we are a little uncomfortable pondering someone’s (or some firm’s) demand for our help. We would much rather ponder the demand for hamburgers or cars, than to think in terms of our own labor as having a demand curve. But, labor like any other good would have a supply curve, or demand curve and a theoretical equilibrium (or proper wage and amount consumed). Like some other markets the market for labor is not free to react to supply increases (or decreases) or similar changes in demand. Keynes recognized that labor was not as elastic as other goods back in the 1930’s even prior tot the development of the Federal minimum wage laws. Keynes knew that people generally aren’t willing to take pay cuts whether or not deflation is present in the economy. With price floors, (which is what a minimum wage is minimum wage recipients don’t generally worry about whether inflation or deflation is present in the economy. Price ceilings (like rent control)are less common in labor wages and still relatively unheard of until the recent congressional action taxing certain higher paid – high profile executives effectively limiting their pay. Of course we should recall that any price control will result in either labor shortages (price ceiling) or gluts (the increase in unemployment).
Generally when mechanisms other than price determine the distribution of scarce resources (like labor or any good) shortages or gluts are created. This forms the origin of the critique of minimum wage laws as they contribute to unemployment. Most economists believe that unemployment has a natural rate that will exist in a healthy economy. Variances in the natural rate would result from variances in fictional unemployment (which occurs when a worker moves from one job to another), structural unemployment (which is caused by a mismatch between workers and jobs) combined with the effects of minimum wage laws. A good example of a structural miss-match between workers and jobs is the tech bubble that was created in the late 1990’s (causing labor shortages) followed by a tech burst in 2001, resulting in a corresponding amount of unemployment.
Opportunity cost which is the purest measure of cost is defined as the next best thing, or the thing that is given up to obtain something. With labor as the “good”, opportunity cost is entertaining to consider. Initially we give up only our leisure in exchange for work so the opportunity cost of working is watching TV or the like. Later in our lives the opportunity cost of a job is a more lucrative second job. Think of the busboy who considers waiting tables; every day he keeps the lower wage job he loses a little income. Adam Smith’s invisible hand indicates this will be unsustainable, that our innate desire to better ourselves may take over. Lastly, perhaps, (if we are lucky) we could describe our own personal supply curve as backwards leaning that is, when our wage is high enough we begin to value our leisure as highly as our work.
The “Lump of Labor” fallacy is a commonly heard but mostly miss-understood theory. It started life as an effort to reduce unemployment and has reared its head notably in both Hoover and Roosevelt’s administrations labor policies. The theory follows that if hours of work are reduced, more employees would be needed, presto, no unemployment. Some obvious problems with the theory are increased costs due to increases in recruitment, training, and supervision costs. Unfortunately, the lump of labor fallacy has effected how citizens view topics as diverse as immigration to labor saving devices, this has been to the detriment of society, remember the Luddites’ rebellion. The Luddites rebellion was a movement based in England 1812 where workers violently objected to easier to operate looms. The Luddites reasoned that less skilled workers would “push” down their wages, and protested. Ultimately workers were arrested, tried and convicted of treason by the government. It could be argued that the introduction of these large stacking frame looms solidified the dominance of British woolens. The fallacy of the Luddite-loom problem is that it assumes employers would chose reduced workforce size over increased production. Other factors that make the lump of labor theory fallacious are increased administration costs due to higher recruitment, training and management costs.
Labor is an economic good like any other with a supply and demand curve, and an equilibrium amount demanded and wage for every job. If we allow false concepts to enter our arguments we might end up with an error in judgment. As with every other input we use in creating our products, a failure to value it properly in relationship to other inputs may leave us less competitive and ultimately less successful.