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The paradox of toil

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  • Gauti B. 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.

Suggested Citation

  • Gauti B. Eggertsson, 2010. "The paradox of toil," Staff Reports 433, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:433
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    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 12:23:49
    2. Comment modéliser la stagnation séculaire ?
      by ? in D'un champ l'autre on 2014-10-29 23:01:00

    Citations

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    Cited by:

    1. Mayer, Eric & Rüth, Sebastian & Scharler, Johann, 2016. "Total factor productivity and the propagation of shocks: Empirical evidence and implications for the business cycle," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 335-346.
    2. Braun, R. Anton & Körber, Lena Mareen, 2011. "New Keynesian dynamics in a low interest rate environment," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2213-2227.
    3. Cacciatore, Matteo & Duval, Romain & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Short-term pain for long-term gain: Market deregulation and monetary policy in small open economies," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 358-385.
    4. repec:eee:moneco:v:92:y:2017:i:c:p:47-63 is not listed on IDEAS
    5. 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.
    6. repec:eee:jmacro:v:54:y:2017:i:pa:p:90-99 is not listed on IDEAS
    7. Thorsten Drautzburg & Harald Uhlig, 2015. "Fiscal Stimulus and Distortionary Taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 894-920, October.
    8. Arias, Jonas E. & Erceg, Christopher & Trabandt, Mathias, 2016. "The macroeconomic risks of undesirably low inflation," European Economic Review, Elsevier, vol. 88(C), pages 88-107.
    9. Nakata, Taisuke, 2016. "Optimal fiscal and monetary policy with occasionally binding zero bound constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 220-240.
    10. Volker Hahn, 2017. "Policy Effects in a Simple Fully Non-Linear New Keynesian Model of the Liquidity Trap," Working Paper Series of the Department of Economics, University of Konstanz 2017-05, Department of Economics, University of Konstanz.
    11. Julien Albertini & Arthur Poirier, 2015. "Unemployment Benefit Extension at the Zero Lower Bound," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 733-751, October.
    12. 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.
    13. Gavin, William T. & Keen, Benjamin D. & Richter, Alexander W. & Throckmorton, Nathaniel A., 2015. "The zero lower bound, the dual mandate, and unconventional dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 55(C), pages 14-38.
    14. Gauti B. Eggertsson & Vaishali Garga, 2017. "Sticky Prices Versus Sticky Information: Does it Matter for Policy Paradoxes?," NBER Working Papers 23961, National Bureau of Economic Research, Inc.
    15. repec:eee:moneco:v:90:y:2017:i:c:p:176-192 is not listed on IDEAS
    16. 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.
    17. Eggertsson, Gauti & Ferrero, Andrea & Raffo, Andrea, 2014. "Can structural reforms help Europe?," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 2-22.
    18. Lancastre, Manuel, 2017. "Redistributive Tax Policy at the Zero Bound," MPRA Paper 82092, University Library of Munich, Germany.
    19. George-Marios Angeletos & Chen Lian, 2016. "Forward Guidance without Common Knowledge," NBER Working Papers 22785, National Bureau of Economic Research, Inc.
    20. Murota, Ryu-ichiro & Ono, Yoshiyasu, 2015. "Fiscal policy under deflationary gap and long-run stagnation: Reinterpretation of Keynesian multipliers," Economic Modelling, Elsevier, vol. 51(C), pages 596-603.

    More about this item

    Keywords

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

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