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Changes in labor supply

Changes in the supply of labor have an effect on the wage rate. The supply of labor shifts when there are changes in the population, changes in preferences and social norms, and changes in wage rates and opportunities in other markets. Learn how to show the effects of changes in labor supply on wage rates in this video.

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Video transcript

- [Instructor] In a previous video, we took a look at the labor markets, and we thought about it in the context of the entire market and how it might impact a firm. So let's say that all of a sudden, the nation's immigration policy changes where they're willing to bring in a lot more folks who have the skills necessary to participate in the labor market that we are studying right now. So when that immigration opens up and more people immigrate into the country, what is going to happen in this labor market? Pause this video, and also think about what is going to be the new equilibrium quantity of labor and our new equilibrium wage? And how might that affect this particular firm? All right, now let's do this together. So if all of a sudden, you have a lot of immigration, new folks who can participate in this labor market, well, that's going to increase the supply at a given wage. So if this is the market labor supply curve, let's call that sub one, it's going to shift to the right. At a given wage, you're going to have more labor, so it's going to be like this. So this is the market labor supply curve two. Now what does that do to the equilibrium wage and the quantity of labor? Well, our new equilibrium wage is going to be lower. Could put it right over there, I'll call that W sub two, with a little star there. And then we have a higher equilibrium quantity of labor. So Q sub two, I'll put a star right over there. Now what happens for this firm? Well, our equilibrium wage in the market has gone down. And we assume that this firm, it is a perfectly competitive labor market, so this firm is just going to pay whatever the market wage is. And so the marginal factor cost for the firm has now shifted down. It is now, this is marginal factor cost one. Now this is marginal factor cost two. And now it is actually rational for the firm to produce more. So this is sub one, and let's call this quantity of labor sub two. And so what are other things that might shift the supply curve for labor to the right? We just talked about immigration into a country. You could also imagine more people that are already in the country being willing or being able to participate in that labor market. For example, in the second half of the 20th century, it became more acceptable for women to participate in the labor force. And so something like that where all of a sudden you have all of these women entering into the labor force or into the labor market for a given market, well, that could also shift the curve to the right. Now let's think about the other way. Let's imagine that you have net migration out of a country. What would happen to the market labor supply curve? Well, in that situation, we would shift to the left like this. At a given wage, there would be fewer people that are willing to work. So this is the market labor supply curve. I will call that sub three. There's other things that could cause it. Maybe people's preferences change. And in this particular labor market, people aren't willing to work there as much. Maybe social norms change where it's just not cool to work in that labor market. Maybe there's another labor market in another industry that all of a sudden is paying better. In that situation, fewer people would be willing to work in this labor market. And so when you shift to the left, your market wages go up, so W sub three, just like that. The quantity of labor is going to go down, Q sub three. And then as we see, if we look at how it impacts a particular firm, in a perfectly competitive labor market, this would be the marginal factor cost for a firm that's participating in that market. So this is MFC sub three. And then now the quantity of labor that this firm would hire is going to go down. So quantity that the firm hires, sub three, put a star over there, and it has gone down. So hopefully what we just went through isn't too much of a surprise for you. As you see, labor markets behave very similarly to the markets for many other things. If more labor enters into a market, well, it's gonna shift the supply of labor to the right. And if more labor leaves the market or doesn't want to be in that market, it's going to shift the market labor supply curve to the left.