15.15 : Effect on Equilibrium: Shift in Labor Demand

A shift in the market demand for labor indicates a change in the total number of workers that employers are willing to hire at any wage. This demand is influenced by non-wage factors such as changes in product prices and technological advancements in production processes. When the demand for labor shifts, it causes the entire demand curve to move.

For example, technological advancements may lead to the availability of improved software tools that help workers produce more output in the same amount of time. Such a labor-augmenting technology increases the value of the marginal product of labor (VMPL). As a result, more workers are demanded at any wage level, shifting the labor-demand curve to the right. This leads to a shortage of workers at the existing wage, forcing firms to increase the wage being offered to attract more workers to increase production. Eventually, both the equilibrium wage and level of employment increase.

Technological advancements can also introduce labor-displacing technologies, such as sophisticated automation systems. This technology reduces the VMPL of workers, decreasing the quantity of labor demanded by firms at any wage level. This creates a surplus of labor at the existing wage, forcing workers to decrease the wage required to maintain their employment. Eventually, fewer workers are hired at a lower wage, decreasing both the equilibrium wage and the equilibrium level of employment.