To keep things simple, let€™s put this into a familiar supply and demand story and assume that in the long run, workers offer a fixed supply of labor: In other words, while they may be picky about jobs in the short run, in the long run they€™ll work regardless of the going wage.

It€™s the businesses who demand labor and workers who supply labor. Currently, let€™s assume the economy starts off at long-run equilibrium, so that the normal number of workers, Q*, are working.
a. Suppose labor demand falls, shifting to the left, as in the figure. What does the short-run supply curve for labor look like if workers refuse to take pay cuts even if it means losing their jobs (we can call this the €œtake this job and shove it€ strategy after the famous country and Western song). Indicate your answer by drawing a new line on the figure, labeling it €œShort-run labor supply.€ You only need to focus on the area to the left of Q*.
b. Recalling your basic supply and demand model, does this fall in labor demand then create a €œsurplus€ of workers or a €œshortage€ of workers?
c. According to the basic supply and demand model, what will happen to the price of labor over time as a result of this fall in labor demand?

Transcribed Image Text:

Nominal wage Long-run labor supply Labor demand (high) Labor demand low) Q Quantity of labor