I n t h I s c h a p t e r y o u w I l L

Any event that changes the supply or de-
mand for labor must change the equilibrium wage and the value of the marginal product by
the same amount, because these must always be equal.
To see how this works, let’s con-
sider some events that shift these curves.
S H I F T S I N L A B O R S U P P LY
Suppose that immigration increases the number of workers willing to pick apples.
As Figure 18-5 shows, the supply of labor shifts to the right from 
S
1
to 
S
2
. At the
initial wage 
W
1
, the quantity of labor supplied now exceeds the quantity de-
manded. This surplus of labor puts downward pressure on the wage of apple pick-
ers, and the fall in the wage from 
W
1
to 
W
2
in turn makes it profitable for firms to
hire more workers. As the number of workers employed in each apple orchard
rises, the marginal product of a worker falls, and so does the value of the marginal
product. In the new equilibrium, both the wage and the value of the marginal
product of labor are lower than they were before the influx of new workers.
Wage
(price of
labor)
Equilibrium
wage, 
W
0
Quantity of
Labor
Equilibrium
employment, 
L
Supply
Demand
F i g u r e 1 8 - 4
E
QUILIBRIUM IN A
L
ABOR
M
ARKET
.
Like all prices, the
price of labor (the wage) depends
on supply and demand. Because
the demand curve reflects the
value of the marginal product of
labor, in equilibrium workers
receive the value of their
marginal contribution to the
production of goods and services.

---

C H A P T E R 1 8
T H E M A R K E T S F O R T H E FA C T O R S O F P R O D U C T I O N
4 0 7
An episode from Israel illustrates how a shift in labor supply can alter the
equilibrium in a labor market. During most of the 1980s, many thousands of Pale-
stinians regularly commuted from their homes in the Israeli-occupied West Bank
and Gaza Strip to jobs in Israel, primarily in the construction and agriculture
industries. In 1988, however, political unrest in these occupied areas induced the
Israeli government to take steps that, as a by-product, reduced this supply of
workers. Curfews were imposed, work permits were checked more thoroughly,
and a ban on overnight stays of Palestinians in Israel was enforced more rigor-
ously. The economic impact of these steps was exactly as theory predicts: The
number of Palestinians with jobs in Israel fell by half, while those who continued
to work in Israel enjoyed wage increases of about 50 percent. With a reduced num-
ber of Palestinian workers in Israel, the value of the marginal product of the re-
maining workers was much higher.
S H I F T S I N L A B O R D E M A N D
Now suppose that an increase in the popularity of apples causes their price to rise.
This price increase does not change the marginal product of labor for any given
number of workers, but it does raise the 
value
of the marginal product. With a
higher price of apples, hiring more apple pickers is now profitable. As Figure 18-6
shows, when the demand for labor shifts to the right from 
D
1
to 
D
2
, the equilib-
rium wage rises from 
W
1
to 
W
2
, and equilibrium employment rises from 
L
1
to 
L
2
.
Once again, the wage and the value of the marginal product of labor move
together.
This analysis shows that prosperity for firms in an industry is often linked
to prosperity for workers in that industry. When the price of apples rises, apple
Wage
(price of
labor)
W
2
W
1
0
Quantity of
Labor
L
2
L
1
Supply, 
S
1
Demand
2. . . . reduces
the wage . . .
3. . . . and raises employment.
1. An increase in
labor supply . . .
S
2
F i g u r e 1 8 - 5
A S
HIFT IN
L
ABOR
S
UPPLY
.
When labor supply increases
from