Figure 1.24: The WS-PS Model, Case 1: Employment Above Equilibrium
Figure 1.24 illustrates the adjustment mechanism in the WS-PS model when employment is above its equilibrium level at point A. At a higher employment level, such as , the real wage required to recruit and motivate workers, as shown by the WS curve (), exceeds the wage that is consistent with firms' profit-maximization, as indicated by the PS curve. This discrepancy means that paying the higher wage would reduce the profit per worker, which is the gap between the labor productivity line and the PS curve. Since this situation is not profit-maximizing and production has become more costly, firms respond by increasing their prices. This price hike leads to a decrease in both output and employment, pushing the economy back toward the equilibrium at point A.
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Figure 1.24: The WS-PS Model, Case 1: Employment Above Equilibrium
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