Question

Assume that the real wage in an economy is held above equilibrium.

a. Graphically illustrate how an increase in technology that raises the demand for labor will cha number of unemployed workers. Be sure to label the axes and the quantities of labor hired and after the technological progress.

b. Explain in words what happens to the number of unemployed as a result of this change.

Answer 1

(a)

In following graph, D0 and S0 are intial labor demand and supply curves intersecting at equilibrium point A with equilibrium wage rate w0 and employment L0.

Since wage rate is held floored at Wf, quantity of labor demanded is L1 and quantity of labor supplied is L2, with market employment being L1, so unemployment (surplus labor) being (L2 - L1).

After increase in labor demand, D0 shifts rightward to D1. Since minimum wage remains at Wf, quantity of labor demanded is L3 and quantity of labor supplied is L2, so market employment increases to L3 and unemployment (surplus labor) is (L3 - L1).

(b)

Since market employment increases but quantity of labor supplied remains unchanged, higher labor demand decreases unemployment.