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The effect of the higher interest rates on the output decisions of firms also leads them to demand less of all their inputs, including labor. Decreases in production lead to decreases in labor demand, as shown in ***Figure 4.19 "A Decrease in Demand for Labor". In turn, decreases in wages and employment (more generally, a decrease in income) lead to decreased demand for goods.
Figure 4.19 Figure 4.19 A Decrease in Demand for Labor
A decrease in demand for labor causes the labor demand curve to shift leftward.
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