Shifts In Labor Supply

a recession caused by declining labor supply?

If a recession were caused by a leftward shift of the labor supply curve, employment would fall, but the real wage would rise—as in the movement from point E to point G. In fact, shifts in labor supply occur very slowly, so they cannot explain economic fluctuations.

Real Wage Rate

Recession Labor

Recession Labor

Labor Demand

70 100 Million Million

Employment

Second, even if such a shift in preferences did occur, it could not explain the facts of real-world downturns. Recessions are times when unusually large numbers of people are looking for work (see Figure 2). It would be hard to square that fact with a shift in preferences away from working.

The same arguments could be made about expansions: To explain them with labor supply shifts, we would have to believe that preferences suddenly change toward market work and away from other activities—an unlikely occurrence. And, in any case, expansions are periods when the unemployment rate typically falls to unusually low levels; fewer—not more—people are seeking work.

Because sudden shifts of the labor supply curve are unlikely to occur, and because they could not accurately describe the facts of the economic cycle, the classical model cannot explain fluctuations through shifts in the supply of labor.

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