Effect on Equilibrium: Shift in Labor Demand

The market demand curve for labor also reflects the value of the marginal product of labor or VMP_L. So, something that changes the VMP_L, such as an increase in the price of a product, shifts the demand curve for labor to the right.

Suppose the price of wheat has risen due to a surge in wheat consumption. Farmers find it more profitable to hire more labor as the revenue generated by each worker rises.

This increase in wheat prices enhances the VMP_L for farm labor and shifts the labor demand curve to the right.

This results in a higher equilibrium wage rate for workers.

The employment level for labor rises to enable more effort, which is required to produce a higher quantity of wheat.

If wheat prices fall because of lower global demand for wheat, VMP_L decreases.

This makes hiring workers less attractive to wheat producers since each worker's contribution to revenue falls. It follows that the demand for labor drops, shifting the demand curve left. This results in lower wages and fewer jobs for farm laborers.