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Q. Classical model of the labor market?
We begin by explaining the classical model of the labor market.
The demand for labor LDis assumed to be inversely related to the real wage W/P
Profit-maximizing firms would want to use labor up to the point where marginal product of labor MPL is equal to the real wage W/P. We have previously presumed that MPL is decreasing in L and demand for labor can be explained in the following graph.
Figure: The demand for labor
From the graph you can conclude that aggregate demand for labor, or just the demand for labor depends on the real wage. If the real wage increases, demand for labor decreases and vice versa. For instance, the demand for labor will fall if W increases and/or if P decreases however it won't change if W and P increase by the same percentage.
In the classical model, markets are characterized by perfect competition and firms can't affect W and P. Though, they do decide how much labor to hire. If you sum all the labor that firms want to hire you get total demand for labor.
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