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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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    Keywords

    Employment; Interest rates; Deflation (Finance); Productivity; Econometric models;
    All these keywords.

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