Question

Is the statement " an increase in labour supply leads to a reduction in real wage" true? Explain

Answer 1

This statement " an increase in labour supply leads to a reduction in real wage" is true to some extent which is based on the demand for labours. The higher the wage rate, the demand for labour is lower. If a product in the market has greater demand, the producer would likely to increase its productivity which lead to the hiring of more labourers for the production purposes. The firms which need manual labourers to incease their output, they employ large number of labourers with nominal wage rate. An inverse relation always exists between the demand of labours and real wage. When the wage rate is higher, producers will go for substitution like applying higher technology and machineries which are more productive and can work for longer duration and require less maintenance. When an economy is in an expanding stage, the demand for labourers automatically goes upward which provides employment to many unemployed people at lower wage rate. While wage rate for manual labour goes down with the increased rate of hiring by a firm to increase the output, skilled labours with knowlege of technology are aleays in greater demand and are paid higher wage rate. For eg, the demand for smartphones will leade to the increased demand for labourers with good wages.