When the supply of labor increases in an economy that is in equilibrium, various effects emerge. Generally, an increase in labor supply leads to an increase in output. This is because more workers are available to produce goods and services, which can enhance productivity.
However, the real rental price of capital typically remains the same in this scenario. This is due to the nature of capital being relatively fixed in the short term; it does not immediately adjust to changes in the supply of labor. Therefore, while labor becomes more abundant, the cost associated with using capital stays stable.
On the other hand, the real wage rate is expected to increase. As more labor flows into the market, employers compete for workers, leading to potentially higher wages being offered. This demand for labor can raise the wage rate, while simultaneously benefiting workers with better compensation.
In summary, with an increase in labor supply, output tends to rise, the real rental price of capital usually stays the same, and the real wage rate tends to increase, reflecting a more competitive labor market.