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The paradox of toil

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  • Gauti Eggertsson

Abstract

This paper proposes a new paradox: the paradox of toil. Suppose everyone wakes up one day and decides they want to work more. What happens to aggregate employment? This paper shows that, under certain conditions, aggregate employment falls; that is, there is less work in the aggregate because everyone wants to work more. The conditions for the paradox to apply are that the short-term nominal interest rate is zero and there are deflationary pressures and output contraction, much as during the Great Depression in the United States and, perhaps, the 2008 financial crisis in large parts of the world. The paradox of toil is tightly connected to the Keynesian idea of the paradox of thrift. Both are examples of a fallacy of composition.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 433.

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Date of creation: 2010
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Handle: RePEc:fip:fednsr:433

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Related research

Keywords: Employment ; Econometric models ; Interest rates ; Deflation (Finance) ; Productivity;

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Blog mentions

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  1. Ridurre le ferie non farà crescere il Pil. L’ultima, insensata, proposta del governo Monti
    by keynesblog in Keynes Blog on 2012-07-18 07:23:49
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Cited by:
  1. Casey B. Mulligan, 2010. "Does Labor Supply Matter During a Recession? Evidence from the Seasonal Cycle," NBER Working Papers 16357, National Bureau of Economic Research, Inc.
  2. Thorsten Drautzburg & Harald Uhlig, 2011. "Fiscal stimulus and distortionary taxation," CQER Working Paper 2011-01, Federal Reserve Bank of Atlanta.
  3. R. Anton Braun & Lena Mareen Körber, 2011. "New Keynesian dynamics in a low interest rate environment," Working Paper 2011-10, Federal Reserve Bank of Atlanta.
  4. N. Gregory Mankiw & Matthew weinzierl, 2011. "An Exploration of Optimal Stabilization Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 209-272.
  5. Eggertsson, Gauti & Ferrero, Andrea & Raffo, Andrea, 2014. "Can structural reforms help Europe?," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 2-22.
  6. Lorant, Kaszab, 2011. "Fiscal multipliers are not necessarily that large: a comment on Eggertsson (2010)," MPRA Paper 35612, University Library of Munich, Germany, revised 16 Dec 2011.

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