Question

5. How does an increase in labor productivity in an industry affect the equilibrium wage in that industry.

How does an increase in labor productivity in an industry affect the equilibrium wage in that industry? Use graphical analysis to illustrate your answer. (Note: You need 2 separate graphs to show the change in the wage rate.

Answer 1

Labour productivity plays a great role in wage determination in an industry.lf one employee is very productive he or she will have a high marginal revenue product of labour and accordingly to economic theory, workers' wages are equal to the marginal revenue product labor.

The following diagram shows initial Equilibrium.DD is the demand curve for labour and SS is the supply curve of . The intersection of DD and SS at point E determines Equilibrium wage level W . The quantity of labour employed at W wage level is Q

Now let's see what will happen if the labour productivity increases

An increase in labour productivity shifts the demand curve from DD to D1 D1 . The new demand curve for labour intersects the supply curve SS at E1 . As a result, Equilibrium wage rises from W to W1 . At W1 wage rate, Q1 workers are employed.