The expansion path for industry employment under perfect competition in long-run equilibrium

Abstract

Beginning from long-run equilibrium under perfect competition, an increase in the wage due to an upward shift in labour supply generates negative profits. In order for long-run equilibrium to be restored, the price of output must increase. This causes the marginal revenue product curve for labour to shift upward. Consequently, even though the wage is higher, it is possible for the firm to end up employing a larger quantity of labour. This raises the following question. After the wage increases due to an upward shift in labour supply, is it possible, in long-run equilibrium, for industry employment of labour to increase? The concavity of the long-run equilibrium input demand functions is used to prove that industry employment will indeed decrease. Hence conventional analysis is proved to be correct.