paradox of toil
{{Short description|Economic hypothesis}}
{{Use dmy dates|date=October 2020}}
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".{{Cite journal
| last = Eggertsson | first = Gauti | author-link = Gauti Eggertsson
| title = The Paradox of Toil | journal = NY Fed Staff Report | issue = 433
| publisher = Federal Reserve Bank of New York
| location = New York, NY |date=Feb 2010
| url = http://www.newyorkfed.org/research/staff_reports/sr433.pdf
| access-date = 2011-04-23 }}
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, 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 paradox of toil was proposed by Gauti Eggertsson in 2009.{{Cite web
| last = Krugman | first = Paul | author-link = Paul Krugman
| title = A New Paradox | department = Conscience of a Liberal (blog)
| work = The New York Times
|date=14 December 2009
| url = https://krugman.blogs.nytimes.com/2009/12/14/a-new-paradox/
| access-date = 2011-04-24 }}
The term was coined to parallel the "paradox of thrift", a concept resurrected by John Maynard Keynes and popularized under that name by Paul Samuelson.{{cite book
|author1=Samuelson, Paul |author2=Nordhaus, William
|name-list-style=amp | title=Economics
| edition=18th | location=New York | publisher=McGraw-Hill | year=2005
| isbn=0-07-123932-4|title-link=Economics (textbook)
}}
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.{{Cite journal
| last = Mulligan | first = Casey | author-link = Casey Mulligan
| title = Does Labor Supply Matter During a Recession? Evidence from the Seasonal Cycle
| journal = NBER Working Paper No. 16357
| date=September 2010
| doi = 10.3386/w16357
| s2cid = 154069428 | doi-access = free
}}
| last = Mulligan | first = Casey | author-link = Casey Mulligan
| title = A 'Paradox of Toil?
| department = Economix: Explaining the Science of Everyday Life
| work = The New York Times
|date=16 December 2009
| url = https://economix.blogs.nytimes.com/2009/12/16/no-new-paradox/
| access-date = 2011-04-24 }}
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.{{Cite journal
| last = Eggertsson | first = Gauti | author-link = Gauti Eggertsson
| title = A comment on Casey Mulligan's test of the paradox of toil (preliminary)
| publisher = Federal Reserve Bank of New York
| location = New York, NY
|date=May 2010
| citeseerx = 10.1.1.171.197
}}
Paul Krugman and Eggertsson have since proposed that the paradox of toil and the paradox of flexibility mean that wage and price flexibility do not facilitate recovery from recessions during a liquidity trap, but actually exacerbate them.{{Citation
| last1 = Eggertsson
| first1 = Gauti B.
| author-link1 = Gauti B. Eggertsson
| last2 = Krugman
| first2 = Paul
| author2-link = Paul Krugman
| title = Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach
| date = 14 February 2011
| url = http://faculty.wcas.northwestern.edu/~gep575/seminars/spring2011/EK.pdf
| access-date = 23 April 2011
| archive-url = https://web.archive.org/web/20111003225708/http://faculty.wcas.northwestern.edu/~gep575/seminars/spring2011/EK.pdf
| archive-date = 3 October 2011
| url-status = dead
}}
Influence
The reasoning behind the paradox of toil, together with the paradox of flexibility, 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.{{Cite web
| last = Baxter
| first = Michael
| title = Why the super rich should pay more tax, and the rest should pay a lot less
| work = Investment & Business News
| publisher = IABN
| date = 22 November 2010
| url = http://www.investmentandbusinessnews.co.uk/headline/why-the-super-rich-should-pay-more-tax-and-the-rest-should-pay-a-lot-less/
| access-date = 2011-04-24
| archive-url = https://web.archive.org/web/20101221060612/http://www.investmentandbusinessnews.co.uk/headline/why-the-super-rich-should-pay-more-tax-and-the-rest-should-pay-a-lot-less/
| archive-date = 21 December 2010
| url-status = dead
}}
See also
Notes
{{reflist}}
External links
- [https://www.economist.com/blogs/freeexchange/2010/03/paradox_toil "Double, double, toil and trouble: the paradox of toil"], The Economist: Free Exchange, 2 May 2010
- [http://blogs.ft.com/money-supply/2009/12/15/the-paradox-of-toil/?Authorised=false The paradox of toil], Money Supply, Financial Times, 15 December 2009
- [https://www.economist.com/blogs/freeexchange/2009/12/up_is_down "Up is down"], The Economist: Free Exchange, 14 December 2009
{{Economic paradoxes}}
{{DEFAULTSORT:Paradox Of Toil}}