Labour Markets & Inequality
⏱ ~3-min readAceMark Guide
What this topic is really about
A fall in labour supply can lead to a rise in real wages if demand is unchanged.. If fewer workers are willing to supply their labour while employer demand is constant, the supply curve shifts left along a downward-sloping demand curve.
Setting the wage floor above the market-clearing level raises the quantity of labour supplied while reducing the quantity demanded by firms. The result is excess supply of labour, observed as unemployment, in an otherwise competitive market.
See the mechanism
This occurs because a leftward shift in the supply curve intersects with a downward-sloping labour demand curve, resulting in a higher equilibrium wage and reduced labour quantity. A diagram for this topic isn't available yet — the worked example below walks the same reasoning step by step.
An exam-style question, fully explained
An economy reports a rise in real wages alongside a fall in the supply of labour to a particular occupation. If labour demand is unchanged, what change in labour supply is consistent with this?
- Identify what the question tests: An economy reports a rise in real wages alongside a fall in the supply of labour to a particular occupation..
- If fewer workers are willing to supply their labour while employer demand is constant, the supply curve shifts left along a downward-sloping demand curve.
- This raises the equilibrium wage and reduces the quantity of labour employed in that occupation.
- Why it matters: This occurs because a leftward shift in the supply curve intersects with a downward-sloping labour demand curve, resulting in a higher equilibrium wage and reduced labour quantity. When labour supply decreases and demand remains constant, the equilibrium wage increases, allowing the higher wage to attract fewer workers to the occupation, thus reducing labour quantity. This process occurs when the labour market experiences a supply shock, where the number of people willing to work decreases, and the labour demand curve remains unchanged, resulting in a higher wage and reduced employment in the occupation.
Traps the examiner sets
- This concept can be confusing as some might think that an increase in labour supply should lead to a decrease in wages, but in this scenario, the supply of labour actually decreases, leading to an increase in wages due to the inelastic labour demand curve.
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