A decrease in the wage rate causes a decrease in the demand for labor. The decreased demand for labor often leads to a decrease in the quantity of labor employed and a decrease in the hours worked by each laborer. The decrease in labor employed and the decrease in hours worked leads to a decrease in the output of the economy.
The decrease in output can lead to a decrease in the standard of living as people have access to fewer goods and services. Additionally the decrease in output can lead to an increase in unemployment as businesses lay off workers in order to cut costs.
There are a number of reasons why a decrease in the wage rate may cause a decrease in the demand for labor. First when wages fall businesses have less money to pay workers and so they demand fewer workers. Second when wages fall consumers have less money to spend and so they demand fewer goods and services. This decrease in demand can lead businesses to reduce production and so they demand fewer workers. Finally when wages fall the government may reduce its spending on public works projects leading to a decrease in demand for workers.
While a decrease in the wage rate may cause a decrease in the demand for labor it is important to note that there are a number of other factors that can affect the demand for labor. For example an increase in the price of inputs may lead to a decrease in the demand for labor as businesses substitution input prices for labor. Additionally a change in technology may lead to a decrease in the demand for labor as automation can replace workers in some tasks.
What happens to labor demand when the wage rate decreases?
When the wage rate decreases the demand for labor increases.