FIGURE 13.4 Industry Labor Demand
In panel a, an industry firm has a labor demand curve of MRPL1 at the initial market wage and output price. Given market wage W1, it hires l*1 units of labor. A fall in the market wage from W1 to W2 reduces all industry firms’ costs and thus the output price. The lower price reduces marginal revenue and shifts in the firm’s labor demand curve to MRPL2, implying that at W2 the firm hires l*2 instead of l*NC. At the market level in panel b, this feedback between the market wage and the output price implies that a wage drop from W1 to W2 increases the quantity of labor demanded from L1 to only L2 instead of the no-feedback increase of L1 to LNC.