Question

Given a typical upward slopping labor supply curve, and a downward slopping labor demand curve in a particular labor market of insurance agents. How would the equilibrium unemployment change if the insurance company is facing an increase in the demand of insurance.

Answer 1

The equilibrium unemployment will decrease in the market for insurance agents.

The equilibrium wages and employment occur when the demand for insurance agents intersects the supply of insurance agents. Now, if the insurance company is facing increased demand for insurance, it will lead to an increase in the demand for insurance agents. Thus, the demand curve shifts tot he right. At the existing wage, there is excess demand. Thus, the wages will rise which will lead to an increase in quantity supplied and a decrease in quantity demanded. This process will continue until there is no excess demand left. Thus, at the new point fo equilibrium more insurance agents are hired and employment has increased. Thus, equilibrium unemployment will decrease.