"We close our analysis of wage theory by examining an important fallacy that often motivates labor market policies. Whenever unemployment is high, people often think that the solution lies in spreading existing work more evenly among the labor force. For example, Europe in the 1990s suffered extremely high unemployment, and many labor leaders and politicians suggested that the solution was to reduce the workweek so that the same number of hours would be worked by all the workers. This view -- that the amount of work to be done is fixed -- is called the lump-of-labor fallacy.
"To begin with, we note the grain of truth in this viewpoint. For a particular group of workers, with special skills and stuck in one region, a reduction in the demand for labor may indeed pose a threat to their incomes. If wages adjust slowly, these workers may face prolonged spells of unemployment. The lump-of-labor fallacy may look quite real to these workers.
"But from the point of view of the economy as a whole, the lump-of-labor argument implies that there is only so much remunerative work to be done, and this is indeed a fallacy. A careful examination of economic history in different countries shows that an increase in labor suply can be accommodated by higher employment, although that increase may require lower real wages. Similarly, a decrease in the demand for a particular kind of labor because of technological shifts in an industry can be adapted to -- lower relative wages and migration of labor and capital will eventually provide new jobs for the displaced workers.
"Work is not a lump that must be shared among the potential workers. Labor market adjustments can adapt to shifts in the supply and demand for labor through changes in the real wage and through migrations of labor and capital. Moreover, in the short run, when wages and prices are sticky, the adjustment process can be lubricated by appropriate macroeconomic policies."
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