Question

Explain how increase in total employment in a city can increase real income per capita?

Answer 1

AN increase in total employment can kick off a virtuous cycle as follows. If a larger fraction of people is employed and earning wages/salaries, the purchasing power in the economy will increase as more and more people now have the money to consume. Consumption expenditure increases and the aggregate demand curve shifts to the right. The increased demand for goods, raises the price of goods and makes it more profitable for the firms to produce. The quantity supplied also increases and the equilibrium level of output in the economy increases. As more production of output requires more hands, the employment rate will improve even further which further boosts demand and so and so forth. Thus, a boost to total employment can raise output per capita or income per capita.