Equilibrium level of employment in the labour market is determined at a point where the demand for labour equals its supply. The equilibrium in labour market is shown in Fig.
In Fig. DN is the demand curve of labour and SN is the supply curve of labour. Equilibrium level of employment is attained at point E, where at (W/P)0 the real wage rate, the demand for labour is ON0’ i.e., the demand for labour equals the supply of labour.
In case, the real wage rate raises to (W/P)1’ the supply of labour increase to (W/P)1 N1. Since, the supply of labour exceeds its demand, the unemployed workers its demand, the unemployed workers would be willing to accept lower wage rate. As a result, the wage rate falls to (W/P)0. Conversely, if real wage rate decrease to (W/P)2 N3. Excessive demand for labour puts pressure on the wage rate, which rises to (W/P)0.
At the full employment equilibrium level, all workers who are willing to offer their services at (W/P)0 the real wage rate are absorbed by the economy.
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