Supply curve of labour is positively sloped because at a given price, higher money wage means higher real wage. This is because:

Real wage = W/P

Increase in wages, with price level constant will therefore mean an increase in Real wage (W/P).

Thus, at each price level there will be a different (W/P) and, thus, different amount of labour supply, Ns → gives amount of labour supplied at each value of money wage. e.g.


(i) Assume at money wage → 2W1 and Price → 2P1

Labour supply → N* [Demand for labour (MPN) = Supply of labour (Ns)]

(ii) If price level is doubled e.g.

If Price → 4P1 (double of 2P1)

Equilibrium in the Labour Market and the Determination of Money Wage

Labour supply curve shifts upwards towards the left to Ns (4P1) (Fig. 2.5).

Less labour is supplied (N2) at the given money wage (2W1) because when price increases (W/P) decreases.

On the other hand, at the given money wage (2W1), when price increases (W/P) decreases. As a result demand for labour increases and demand curve for labour shifts to the right from MPN. 2P1 to MPN. 4P1 and employment increases from N* to N1.

But if there is proportionate increase in both money wage and price level:


from 2W1 to 4W1 and then to 6W1 and 2P1 to 4P1 and then to 6P1

Supply of labour and demand for labour will not change because the ratio of (W/P) remains same i.e., 2W1/2P1 = 4W1/4P1 = 6W1/6P1

Thus, demand of labour will be constant at N*, that is, at full employment level.