Countering the “Lump of Labor” Fallacy: Two Lessons

January 06, 2021
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Ever worry that computers and robots will take too many jobs?

If you have, you’re in good company: 72% of respondents to a 2017 Pew Research survey had the same fear about automation. But that concern and a similar worry that immigrant workers will leave too few jobs for a country’s native-born workers are rooted in a mistaken belief with an odd name, the “lump of labor” fallacy.

The fallacy is the assumption that there is a fixed amount of work, Economic Education Coordinator Scott Wolla explained in a Page One Economics essay. The monthly publications provide short overviews of economic concepts and current events.

The “lump of labor” fallacy is the assumption that there is a fixed amount of work.

“It's a tempting idea to some because it seems to be true. For example, jobs can be lost to automation and immigration,” Wolla wrote. “However, that is not the full story.”

If the fallacy were true, jobs could not be created, just redistributed, he wrote. The essay outlined two “lessons” that run counter to the fallacy:

  1. Job losses in one industry can support growth in other industries.
  2. The economic “pie” is not a fixed size.

Job Losses in One Industry Can Support Growth in Other Industries

If jobs are lost to automation, why doesn’t the total number of jobs necessarily decrease?

Declines in one industry can be offset by growth in others—and can free workers to move to those growing industries. Labor is a scarce economic resource –workers are one of the factors of production that serve as the building blocks of the economy. So, as workers are let go in shrinking firms or industries, other firms or industries are likely to employ them. Of course, this assumes a healthy economy; recessions make these transitions more difficult.

Wolla gave a historical example: In 1900, 41% of the U.S. workforce worked in agriculture. After a century of technological change in that industry, only 2% did. But while the number of people working in agriculture changed a lot, total employment in the United States didn’t decline.

“The mechanization of agriculture in the early twentieth century made possible the large increase in employment in new industry and factory jobs, a growing farm equipment industry, and cotton milling,” Wolla wrote.

So, automation can be a substitute, or replacement, for human workers, but it also can be a complement—used jointly—with labor.

The U.S. labor force and employee numbers have grown over time, as can be seen in the chart from St. Louis Fed online economic database FRED below.

The labor force is the number of people who are either working or are available to work and have recently looked for a job. The civilian labor force in the U.S. grew from about 60 million in January 1948 to about 160.5 million in November 2020, figures that include a steep drop in April 2020 due to the COVID-19 pandemic. Employment has also grown over those years—from 44.7 million Editor’s note: This post has been updated to correct the January 1948 employment number in the description of the chart. to 142.6 million. (There is more variation in employment than in labor force numbers due to business cycle effects.)

The Economic “Pie” Isn’t a Fixed Size

Imagine the economy is a pie. According to the lump of labor fallacy, the size of this pie doesn’t change, Wolla said in the essay. For one person to get a bigger piece, the other pieces would need to get smaller.

apple pie

Under that fallacy, the same thing would happen if more workers, such as immigrants, joined an economy’s workforce: More people would be splitting up the same-size pie, and some slices would have to get smaller.

Economists, however, often point out that the economy is not stuck at one size—it expands over time.

“The individual pieces of the pie can get bigger together,” Wolla wrote.

To continue using the analogy—where do we get more filling and pastry to grow the pie?

Two sources are the automation and additional workers that people sometimes fear will lead to fewer jobs and smaller pieces of pie for those already working.

Automation and productivity

Economies grow when productivity increases: when workers are each able to produce more for every hour of labor than they used to.

Automation that might displace workers in a particular industry might also contribute to rising productivity in that industry and thus the economy overall, Wolla wrote.

More workers and more demand

New workers “might be immigrants who establish new households or members of existing households who enter the workforce (such as more women have since the 1960s and new graduates do each year),” Wolla wrote.

Those workers don’t just earn income from jobs; they also spend some of it on goods and services, increasing demand. That means demand also will increase for workers to produce those goods and services. If more people need cars, for example, demand increases for autoworkers.

A simple economic model, the circular flow model, helps illustrate the idea.

  1. When workers are added to the economy, the income they earn is spent on goods and services.
  2. The spending increases demand for those goods and services, which are provided by businesses.
  3. With the increase in demand, businesses’ need for the labor that produces the goods and services increases. Households provide the labor.

In other words, the economic pie gets bigger—and new jobs are created.

The Circular Flow Model

The Circular Flow Model

Difficulties in the Short Run

But Wolla cautioned that economic models are simplified versions of reality intended to make complex ideas easier to understand. In simplifying concepts, however, some of the finer points can be missed.

While the simple circular flow model suggests that the economy adds new labor resources seamlessly, the adjustments aren't always smooth—automation and immigration affect workers in different ways. Some workers displaced by automation lack the skills to move to new jobs. Or they might have to move and start all over in another industry or another region.

And when an immigrant worker can substitute for a native-born worker, the native-born worker can lose a job or see his wages decrease.

“Both immigration and technological advance provide benefits to the economy generally, but they can make some individual workers worse off,” Wolla wrote.

1Editor’s note: This post has been updated to correct the January 1948 employment number in the description of the chart.

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This blog explains everyday economics, consumer topics and the Fed. It also spotlights the people and programs that make the St. Louis Fed central to America’s economy. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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