[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

REAL WAGE (w/P )
w 0 /P
w 1
/P
A B C
Investment
Labor
curve
supply
Saving
curve
curves
Y1
f
Y f
Aggregate
Labor
0
production r 0
demand
function
curve
r 1
L 0
L 1
L 0
L 1 SAVING (S) AND INVESTMENT (I )
LABOR (L)
LABOR (L)
OUTPUT (Y )
REAL INTEREST RATE (r )
Figure 24.10
EFFECTS OF AN INCREASE IN
THE SUPPLY OF LABOR
Panel A depicts the labor market. As more women enter the labor force, the labor supply
curve shifts to the right, from L 0 to L 1 . This results in a decrease in the equilibrium real
wage from w 0 /P to w 1 /P and an increase in employment. Panel B depicts the aggregate
production function; with employment higher, potential GDP rises from Y f 0 to Y f 1 . Panel C
depicts the capital market. Saving increases as a result of increased income; the saving
curve shifts to the right. The real interest rate falls, and in the new equilibrium, both
saving and investment have increased.
We have used the full-employment model to analyze the impacts of two important
changes in the economy: those associated with the introduction of a new technology
(personal computers) and those associated with a change in the labor force.
To focus on the effects each would have, we studied each change in isolation, assuming
that nothing else was changing. In fact, both effects have been at work for more
than thirty years. Both have combined to expand employment and raise potential
GDP. Since the introduction of new technologies tends to raise real wages, while the
expansion in the labor supply tends to lower real wages, their combined effect on
real wages could be to increase them, decrease them, or leave them unchanged.
Computer technology has increased the productivity of a wide
range of workers.
542 ∂ CHAPTER 24 THE FULL-EMPLOYMENT MODEL