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".[1] 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.[1]
The paradox of toil was proposed by Gauti Eggertsson in 2009.[2] 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.[3]
^ abEggertsson, Gauti (February 2010). "The Paradox of Toil" (PDF). NY Fed Staff Report (433). New York, NY: Federal Reserve Bank of New York. Retrieved 23 April 2011.
^Krugman, Paul (14 December 2009). "A New Paradox". Conscience of a Liberal (blog). The New York Times. Retrieved 24 April 2011.
^Samuelson, Paul & Nordhaus, William (2005). Economics (18th ed.). New York: McGraw-Hill. ISBN 0-07-123932-4.
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