An increase in labor supply will increase the equilibrium wage rate. Select one:
True
False
The correct answer and explanation is:
The correct answer is: False
An increase in labor supply typically leads to a decrease in the equilibrium wage rate, not an increase.
Here is an explanation:
In the labor market, wages are determined by the interaction of labor supply (workers willing to work) and labor demand (employers seeking workers). The equilibrium wage rate is the wage at which the quantity of labor supplied equals the quantity of labor demanded.
When labor supply increases, more workers are willing to work at each wage level. This shifts the labor supply curve to the right. Holding labor demand constant, the increase in available workers creates more competition among workers for jobs. Employers have a larger pool of candidates, so they can offer lower wages and still find employees. As a result, the equilibrium wage rate tends to fall.
On the other hand, if labor supply decreases, fewer workers are available. Employers compete to hire from a smaller pool, driving wages up.
The key principle is the law of supply and demand. When supply increases and demand remains unchanged, the price—in this case, wages—tends to drop. Conversely, if demand rises while supply remains unchanged, wages tend to increase.
In summary, an increase in labor supply leads to a greater number of workers competing for jobs, which puts downward pressure on wages and lowers the equilibrium wage rate. Therefore, stating that an increase in labor supply increases the equilibrium wage rate is incorrect.