Think of events that might lead to a leftward shift in the labor supply curve accompanied...

Think of events that might lead to a leftward shift in the labor supply curve accompanied by a rightward shift in the labor demand curve. With the help of a graph, discuss the effects on the equilibrium level of employment and wage.

Expert Solution

A fall in immigration from other countries will reduce labor supply in a country, causing a leftward shift of labor supply curve. At the same time, increase in consumer income will increase the demand for a normal good, which will cause its producers to increase production, increasing their demand for labor, shifting labor demand curve rightward.

A leftward shift of labor supply curve will increase wage rate and decrease employment, and a simultaneous rightward shift in demand curve will increase wage rate and increase employment. The net effect is a definite increase wage rate. But employment may rise, fall or stay unchanged on basis of whether leftward shift in labor supply curve is lower, higher or equal in magnitude to the rightward shift in labor demand curve.

In following graph, wage rate (P) and employment (Q) are depicted vertically and horizontally respectively. D0 & S0 are initial labor demand & labor supply curves intersecting at point A with initial wage rate P0 and initial employment Q0. As D0 shifts right to D1 and S0 shifts left to S1, they intersect at point B with higher wage rate P1 and new employment level Q1. In the graph, leftward shift in supply curve is less than rightward shift in demand curve, so employment is higher at Q1.

Rahul Sunny answered 2 years ago

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