Question

Many business cycle theories, formal and informal, claim that labor inputs rise and fall over the business cycle because of a corresponding rise and fall in labor demand. But the only way for a “fall in labor demand” to massively shrink employment is if the labor supply curve is flat. And the flatness of the labor supply curve is itself one of the most controversial concepts in macroeconomics. Briefly explain the intellectual battle over the shape of the short-run labor supply curve and explain exactly two major positions on this controversial issue.

Answer 1

Labor supply curve in short run remains flat only when pricelevel doesn't increases despite increasing production. The surrounding controversial issue is that rise in production should be blended with fall in prices and viceversa which doesn't happen in certain cases making the curve flatter.

Second issue being short run aggregate supply curve remains flat irrespective of changes in other macroeconomic and microeconomic variables which makes it controversial.

However short run aggregate supply curve remains vertical when increasing demand of production also leads increase in prices.