classical labour market, A rise in the real wage will bring a decrease in the quantity, Macroeconomics

classical labour market, Macroeconomics

Assignment Help:

A rise in the real wage will bring a decrease in the quantity demanded of labor because of diminishing returns in production. As more and more labor is employed, it is increasingly less productive. Firms will seek to maximize profits, which means that they will continue to employ labor as long the marginal product exceeds the real wage paid. The last hour of labor hired will be that hour where the marginal product is equal to the real wage. If the real wage increases, the firm will then find that the marginal product of the last labor hour is less than the real wage. This decreases profits, so the firm will reduce the amount of labor it employs unless once again the marginal product of the last hour of labor employed is equal to the real wage.

5. An increase in the real wage will increase the quantity of labor supplied for two reasons: the hours supplied per person will increase; and the labor force participation rate will increase. When the real wage increases the opportunity cost of leisure, which means that households will be willing to supply more labor. This will increase the households'' incomes, which will increase the households'' demand for all normal goods, including leisure. However, this income effect is assumed to be smaller than the opportunity cost effect, so the hours per person will increase. When the real wage increases, the relative value of other productive activities decreases. This means that more people who had previously chosen not to be part of the labor force because the real wage was less than the value of other productive activities are now more likely to find the real wage higher than alternatives and will chose to enter the labor force.

6. If the real wage is above or below the full-employment level there will be a surplus or shortage of labor that will then cause the real wage to adjust. For example, if the real wage is above the full-employment level, there is a surplus of labor. This will cause the real wage to fall. If the real wage is below the full-employment level, then (in the long run) there is a shortage of labor and this will cause the real wage to rise. In either case, the real wage will adjust until the surplus or shortage is eliminated and the labor market is in equilibrium at full-employment.

7. Potential GDP is determined from the labor market equilibrium. When the labor market is in equilibrium, there is full employment. This is the amount of employment which in turn determines the amount of potential GDP.

Write Your Message!

Name

Email id

Message

Verfication Code

User Account

All Pages

classical labour market, Macroeconomics

Related Discussions:- classical labour market

Credit multiplier, how can the central bank influence the size of the multi...

Simultaneous determination of y in the is-lm model, Q. Simultaneous determi...

Average cost of capital, Suppose a firm raises $23 million dollars by issui...

Flossy''s budget constraint, Flossy has a quasi-linear utility function, 16...

IS and LM model, An economy shows the following features C=50+0.9(Y-T) T=1...

Organizational design, discuss approach to organizational design

Demand for money, what is the meaning of the statement ''money is not merel...

Command economy, define history and full deatil of command economy

Economic luxury and an economic necessity, What is the difference between a...

Solow growth model, graph the central equation of the solow model. argue th...

Write Your Message!

Featured Services

Online Tutoring

Project Development

Exam Preparation

Course Help

Assignment Help

Popular Subjects

Assured A++ Grade

Academics

Major Subjects

Majors

Get In Touch

TERMS & POLICIES

HELP & SUPPORT