The figure below shows the labor demand and labor supply curves for an economy.

-Refer to the figure above.The labor market is currently at point E.Which of the following is likely to happen if a recession hits the economy,assuming that wages are flexible?
A) The labor market equilibrium will move from point E to point G.
B) The labor market equilibrium will move from point E to point H.
C) The labor market equilibrium will move from point E to point D.
D) The labor market equilibrium will move from point E to point F.

Question

The figure below shows the labor demand and labor supply curves for an economy.
 
-Refer to the figure above.The labor market is currently at point E.Which of the following is likely to happen if a recession hits the economy,assuming that wages are flexible?
A) The labor market equilibrium will move from point E to point G. 
B) The labor market equilibrium will move from point E to point H. 
C) The labor market equilibrium will move from point E to point D. 
D) The labor market equilibrium will move from point E to point F.

Quizplus · Accepted Answer

In a recession, the demand for labor decreases. As a result, the labor demand curve shifts to the left from DL to DL'. This creates a surplus of labor at the initial wage rate and puts downward pressure on wages. As wages fall, firms become willing to hire more workers, and workers become willing to supply less labor. This results in a movement up along the labor supply curve to a new equilibrium point. In this case, the new equilibrium point is at point D, where the wage is lower and employment is also lower.

The Figure Below Shows the Labor Demand and Labor Supply