What is the relationship between aggregate demand and wages in the long run?

The relationship between aggregate demand and wages in the long run indicates that as aggregate demand rises, wages tend to increase as well. This occurs because higher aggregate demand leads to increased production levels, prompting firms to hire more workers and, in turn, requiring them to raise wages to attract and retain employees. When demand for goods and services rises, employers face pressures to improve workforce conditions, which often manifests as higher wages. A growing economy typically necessitates a stronger labor market, which fosters job competition and leads to upward wage pressures.

Moreover, in the long run, as firms anticipate sustained increases in demand, they invest in capital and labor, further pushing wages upward due to heightened competition for skilled labor and increased productivity. This dynamic illustrates how aggregate demand plays a critical role in influencing the labor market and wage levels, aligning with broader economic trends and productivity gains.