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Tight labour market

When an economy is close to full employment and recruitment becomes difficult placing upward pressure on wages.

Below is a depiction of what happens in the labour market of an economy that is close to full employment. Once an economy aproaches full employment more output needs to be made in order to meet ever-increasing demand for products. However, if the economy is close to full employment extra labour cannot be hired easily as the pool of available workers is small. Therefore the aggregate demand for labour curve shifts to the right as firms would like to employ more workers but the supply is not available. Ultimately this excess demand causes existing workers wages to steadily rise as workers now hold higher bargaining power. This is shown in the diagram by moving to point C at a higher wage rate of W1 to cancel out the excess demand for labour.

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