Microeconomics Question from Walter E. Williams:[]
D.H. Robertson divides the effects which "an artificial raising of wages" is apt to have on employment into "two analytically separable reactions"--first, "A movement along the existing marginal productivity curve," and second, "a cumulative lowering of the curve." Explain the two reactions and indicate what assumptions concerning the other factors of production are involved.
Answer[]
Labor is an input to production. In the first case, an increase in the price of labor will reduce the amount of labor demanded. Firms will reduce hours, perhaps, to keep costs in line in the short run. In the long run, the demand for labor will shift if the price of labor remains high. Firms will substitute capital for labor in the long run, shifting the demand curve to the right.
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