The fallacy of the lump of labour theory: Evidence for Latin America

Abstract

The purpose of this paper is to provide empirical evidence for some Latin‐American countries on the “lump of labor” theory, which implies a negative effect of the increase in the labor force of older adults on the demand for employment of young people, at a time in history where much of the debate, in an aging population context, focuses on the need to generate incentives to extend the working lifespan of senior adults. The results obtained from the estimation of a fixed effect model using a panel of annual data, built with information from household surveys of eleven countries between 2002 and 2019, shows that rather than suggesting a crowding‐out effect, allow us to suggest a positive correlation between the employment of older adults and the employment of youth. Additionally, results show a positive association between the labor income of the older workers and the labor income of the youth. One argument that could be behind these results is that an expansion in the employment rate of older adults maintains a positive effect on economic growth and therefore a greater demand for employment, which could be youth employment.