A Rival Industry Bids Workers Away
A competing industry raises its pay, workers leave this market, labor supply shifts left, and the wage rises while employment falls.
A Rival Industry Bids Workers Away
Labor MarketA competing industry raises its pay, workers leave this market, labor supply shifts left, and the wage rises while employment falls.
Equilibrium at Quantity of Labor 50, Wage ($/hr) 15
Start in Equilibrium
The competitive labor market begins in equilibrium where labor supply (SL) crosses labor demand (DL = MRP). The wage and the quantity of workers hired are set at that intersection.
Now try it yourself: shift the curves in a graded FRQ drill, or open this graph in the free sandbox.
A Rival Industry Bids Workers Away, step by step
- 1
Start in Equilibrium
The competitive labor market begins in equilibrium where labor supply (SL) crosses labor demand (DL = MRP). The wage and the quantity of workers hired are set at that intersection.
- 2
A Competing Industry Raises Pay
A nearby industry that hires the same skills announces a large pay increase. The wage available in alternative jobs is a determinant of labor supply, because it sets the opportunity cost of working in this market.
- 3
Workers Exit, Supply Shifts Left
Some workers take the better paying jobs elsewhere, so fewer people are willing to work here at every wage and labor supply shifts leftward. Labor demand does not move: this market's output price and its workers' marginal product are unchanged, so the marginal revenue product curve stays exactly where it was.
- 4
New Equilibrium: Higher Wage, Fewer Workers
Firms must bid against the rival industry for the workers who remain, so the wage rises. Hiring still stops where the wage equals marginal revenue product, and moving up along the unchanged demand curve puts that point at a smaller quantity, so employment falls.
- 5
Read the Pattern
Wage up and employment down is the signature of a supply-side shock in a factor market. A demand-side shock, such as a change in productivity or in the output price, moves the wage and employment in the same direction instead. Checking which pair of arrows the question describes is the fastest way to name the curve that moved.
Where it ends up
When a competing industry raises its wage, workers exit this market and labor supply shifts left, so the equilibrium wage rises while the quantity of workers employed falls.
Now draw it yourself
Same graph, graded on whether you move the right curve and leave the rest alone.
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