Supply and Demand (in that order): Economics Lesson from the ...

In many recessions, the demand for labor gets much of the blame. The demand explanation says that, with orders for their products down, many employers have trouble finding productive uses for their employees. Some employees are then let go. In this view, productivity – the amount produced per hour worked – should decline because reduced productivity is one of the driving forces of layoffs. Gross domestic product thereby declines for two reasons: fewer workers and less productivity per worker.

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The second type of explanation is reduced labor supply.

Suppose, for the moment, that people were less willing to work, with no change in the demand for their services. This means that each worker who remains employed would have to be more productive because employers have to produce with fewer workers.

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Professor Douglas gave us a formula for determining how much output per work hour would increase as a result of a reduction in the aggregate supply of hours: For every percentage point that the labor supply declines, productivity would rise by 0.3 percentage points.

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