A fall in labor costs will cause aggregate demand to rise. This is due to the fact that people are purchasing more goods when they have more money and also because business owners feel less pressure to keep prices low.
A decrease in labor costs causes a shift from supply-side factors (lower wages) to demand-side factors (higher consumption). A fall in labor costs will cause aggregate demand to rise. This is due to the fact that people are purchasing more goods when they have more money and also because business owners feel less pressure to keep prices low. A decrease in labor costs causes a shift from supply side factors (lower wages) to demand-side factors (higher consumption).
Supply side: Higher productivity per worker, higher capital intensity, lower wages => Lower cost of production => Higher level of output produced relative to price level and other economic variables. The effect on this side depends heavily on the elasticity of substitution between inputs used for production=> More substitutability = More Elastic Supply Side= Greater impact from changes in input factor(s).
