The Maine Labor Market, Say’s Law, and the Lump of Labor Fallacy Fallacy

JOHN Buell’s op-ed published in the BDN last week highlighted the effectiveness of work sharing in Germany to suppress unemployment amid slow economic growth.  Likewise, as Paul Krugman recently noted, France has also been able to buoy it’s labor market, but does not note that the country has done this through similar practices as the Germans. The reason for Krugman’s omission is likely intentional, as economist Tom Walker points out, he has not been a fan of work sharing programs.  From Walker, quoting from two Krugman articles; one from 2003, and one from 2014:

Paul Krugman in 2003:

“Traditionally, it is a fallacy of the economically naïve left — for example, four years ago France’s Socialist government tried to create more jobs by reducing the length of the workweek.”

Paul Krugman in 2014:

Well, I hadn’t looked at this data for a while; and where we are now is quite stunning:

“Since the late 1990s we have completely traded places: prime-age French adults are now much more likely than their US counterparts to have jobs.

“Strange how amid the incessant bad-mouthing of French performance this fact never gets mentioned.”

Now that you’ve mentioned this fact, Paul, how about revisiting the cogency of the lump-of-labor fallacy claim?

“Economists call it the “lump of labor fallacy.” It’s the idea that there is a fixed amount of work to be done in the world, so any increase in the amount each worker can produce reduces the number of available jobs. (A famous example: those dire warnings in the 1950’s that automation would lead to mass unemployment.) As the derisive name suggests, it’s an idea economists view with contempt, yet the fallacy makes a comeback whenever the economy is sluggish.”

 In the last paragraph, Krugman is echoing the criticism a lot have for work-sharing programs because, as Krugman notes, it assumes that there is a finite amount of work to be done.  Other instances where the lump of labor fallacy is discussed is when policymakers suggest lowering the retirement age to move older workers out of the labor force and move younger workers into their place to lower unemployment of younger workers.  Similarly, those who oppose automation are said to be committing the fallacy.  Perhaps the most used illustrations of the lump of labor fallacy are the Luddites of the 18th century, skilled workers who destroyed the machines that were to replace them for fear of unemployment, and farming, where through the introduction of mechanized farm equipment the percentage of America’s labor force working in agriculture fell from 41% in 1900 to 2% in 2000 while increasing output.

Those like Krugman who suggest that the idea of a limited amount of work often note that while automation did displace workers (such as the Luddites and farmhands), it allowed those workers to seek employment in other areas.  For instance, without moving 38% of the labor force off of the farms and into other sectors, we might not have any number of industries providing any number of goods and services.  However, the representation of those who support work-sharing and similar programs to address unemployment offered by those like Krugman overly-simply the rationale’s underpinning work-sharing and similar programs; the issue is not whether there are other jobs that could be done for those displaced workers, rather, the issue is whether there is demand for labor in those other jobs/industries.

Markets exist because their are two entities; suppliers and consumers.  Without one or the other, there is no market.  In the case of displaced workers, there is obvious supply (displaced workers), but there is not necessarily demand for that supply.  Krugman and others are themselves making a fundamental flaw by assuming Say’s Law–that supply creates its own demand; that those displaced workers will create a demand for their labor.  The problem with Say’s Law is that it assumes there can never be overproduction.  This, of course, fails the empirical test.

So, Krugman and others suggesting that policies calling for work-sharing to decrease unemployment adhere to the lump of labor fallacy is in turn a fallacy of it’s own; the lump of labor fallacy fallacy.  But why do I mention this in the context of the Maine labor market?  Simple.

In an op-ed published this morning, the Portland Press Herald writes:

There are many reasons Maine will never be like Utah, which consistently ranks at the top of the business-climate rankings that rarely reflect well on this state.

. . . 

But the lesson from Utah is that Maine must find an area of common agreement – however narrow – and make a long-term commitment to making it successful.

The most reasonable place to start is with higher education. Calculated, sustained investment is necessary in this ares to build a better workforce, and to fuel the state economy.

Speaking last week at the annual conference of the Maine Real Estate and Development Association, Alan Hall, an entrepreneur and “angel” investor from Utah, said his state has set a goal to have 66 percent of all adults hold a college degree or technical certificate by 2020.

That’s lofty, as no other state has reached that level. Utah, at 43 percent, is in the middle of the pack nationwide, but climbing, with state colleges and universities increasing the number of degrees awarded by about 4 percent each of the past three years.

Maine’s rate is around 38 percent, below the New England average. An effort launched in 2004 aimed to increase the rate to 56 percent by 2020, though that effort was repurposed by a new coalition last year, with the reformed goal of 50 percent.

It wouldn’t be easy to hit even that lower target under normal circumstances, and the higher education situation in Maine is hardly normal.

Maine’s financial support for higher education has been declining steadily for years.

According to a report by the Mitchell Institute, a group concerned with raising college aspirations for Maine students, state spending on higher education as a percentage of personal income has dropped 40 percent since 1990, and it is at its lowest level since 1967.

Raising the state’s financial commitment to its colleges and universities is only part of creating a more highly skilled workforce. Too many Maine students come out of high school unprepared for the next level, a problem that demands reform stretching back to early education.

By failing to invest properly in the state’s higher education system, however, Maine is playing a long, drawn-out, losing game. Only by taking seriously the state’s commitment to its higher institutions of learning can Maine expect to raise personal incomes and provide businesses with the manpower necessary to grow.

That’s something everyone can get behind.

While the op-ed speaks of calculated investments in education, it only addresses increasing the supply of degree holders in the labor force.  Because the article fails to address what other areas aside from increasing the number of degree holders require investment, one is left to conclude that increasing the number of degree holders is the key to fueling the economy; which, as noted above, is a faulty economic premise to build policy from because there is such a thing as over-production.  Discussions about the supply of labor without any acknowledgement of whether there is adequate demand for that supply are incomplete.

As I previously discussed, many discussions regarding the need to boost the number of degree holders in Maine’s labor force are premised on the Carnevale report, that drastically overstates the demand for those degrees, and impliedly argues that supply will create its own demand.  In Maine, that argument is echoed far too often, if only impliedly.

John Haskell

About John Haskell

John graduated from the University of Southern Maine with a degree in Political Science, and from the University of Maine School of Law. He has worked in both the public and private sectors, and currently, works with a small business services company in the Mid-Coast area.