Labor Surplus

Definition

A labor surplus refers to a situation where the supply of labor in the economy exceeds the demand for labor. This occurs when there are more workers available for employment than there are jobs to be filled, resulting in high unemployment rates.

5 Must Know Facts For Your Next Test

1. A labor surplus can lead to downward pressure on wages as employers have more bargaining power in the labor market.
2. Governments may implement policies such as job training programs, public works projects, and unemployment benefits to address a labor surplus.
3. In a labor surplus, the quantity of labor supplied exceeds the quantity of labor demanded at the current market wage rate.
4. The existence of a labor surplus is a key component of Keynes' Law, which states that demand determines output rather than supply.
5. The labor surplus is in contrast to Say's Law, which assumes that supply creates its own demand, leading to full employment.

Review Questions

• Explain how a labor surplus relates to Keynes' Law in the AD/AS model.
  • In the context of the AD/AS model, a labor surplus is a key component of Keynes' Law, which states that demand determines output rather than supply. When there is a labor surplus, the quantity of labor supplied exceeds the quantity of labor demanded at the current market wage rate. This leads to downward pressure on wages and higher unemployment, contradicting Say's Law, which assumes that supply creates its own demand and leads to full employment. The labor surplus supports Keynes' view that demand, not supply, is the driving force in the economy.
• Describe how a labor surplus relates to the relationship between wages and employment in the AD/AS model.
  • In the AD/AS model, a labor surplus indicates that the supply of labor exceeds the demand for labor at the current wage rate. This means that employers have more bargaining power and can push wages down, leading to a decrease in the quantity of labor demanded. Conversely, workers have less bargaining power and are more willing to accept lower wages to secure employment. The labor surplus creates a situation where wages and employment are inversely related, as employers can hire more workers at lower wages, contradicting the assumptions of Say's Law.
• Evaluate how the existence of a labor surplus challenges the assumptions of Say's Law in the AD/AS model.
  • The presence of a labor surplus directly challenges the core assumptions of Say's Law, which states that supply creates its own demand and leads to full employment. In the AD/AS model, a labor surplus indicates that the quantity of labor supplied exceeds the quantity of labor demanded at the current wage rate, resulting in unemployment. This contradicts Say's Law, which assumes that all supply will be purchased, and that the economy will automatically adjust to full employment. The labor surplus supports Keynes' view that demand, not supply, is the driving force in the economy, and that government intervention may be necessary to address issues like unemployment caused by a lack of demand.

Related terms

Unemployment: Unemployment refers to the state of being without a job or not having enough paid work.

Demand for Labor: The demand for labor is the amount of labor that employers are willing to hire at different wage rates.

Supply of Labor: The supply of labor is the number of people who are available and willing to work at different wage rates.