Explain how an increase in the productivity of labour would affect the demand for labour in:...

Explain how an increase in the productivity of labour would affect the demand for labour in: (a) the short-run (b) the long-run.

Expert Solution

In short run, an improvement in labor productivity causes an increased demand for labor. It just sounds wrong.because if productivity increases, firm won't need as much labor to produce given amount of output as they produced before. So labor demand will fall. So increase in labor productivity has a potential to reduce employment growth in the economy. Because firm will be able to satisfy demand using fewer workers to given output. If overall demand in the economy has not expanded, then an increase in labor productivity could lead to fall in employment level in short run.
In long run, firm want to produce higher amount of output. So increase in labor productivity results rising labour demand. As a result output and employment will be higher. The increase in demand for labor will tend to boost labor wages. At higher wages labor will increase their labor supply. As additional workers employed marginal productivity of labor will diminish greater than labor wages. It will reduce the demand for labor in long run.

Rahul Sunny answered 2 years ago

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