6.2.1

Demand for Labour

Test yourself

Demand for Labour

The demand for labour is a derived demand (a demand resulting from demand for something else) from demand for goods and services that labour can produce.

Illustrative background for Derived demandIllustrative background for Derived demand ?? "content

Derived demand

  • The demand for labour is a form of derived demand.
  • If the demand for a product increases, the demand for labour needed to produce the products will increase.
  • Labour is only employed if they provide a net benefit to the firm.
Illustrative background for Marginal productivity of labourIllustrative background for Marginal productivity of labour ?? "content

Marginal productivity of labour

  • The marginal revenue product (MRPL) is the additional revenue from hiring one more worker.
  • It is useful for the firm to continue hiring up until the MRP from the last labour input is equal to the marginal cost (cost of employing new employees).
    • This assumes the wage is equal to the marginal cost - like in a perfectly competitive labour market.
  • Firms should only employ workers that increase revenue by a greater amount than their cost to the firm.
  • According to marginal productivity theory, MRPL determines demand.
Illustrative background for MRP<sub>L</sub> equationIllustrative background for MRP<sub>L</sub> equation ?? "content

MRPL equation

  • Marginal revenue product (MRP) = marginal physical product of labour (MPP) × marginal revenue (MR).
Illustrative background for Elasticity of demand for labourIllustrative background for Elasticity of demand for labour ?? "content

Elasticity of demand for labour

  • Elasticity of demand for labour is a measure of how much demand for labour changes as wages change.
    • Elasticity of demand for labour = % change in the quantity of labour demanded ÷ % change in the wage rate.
  • In the long run, it is more elastic.
    • This is because there is more time to find a replacement worker.
  • The easier it is to replace a worker, the more elastic the demand is.
  • The more price elastic the demand for the product is, the more elastic the demand for labour will be.
Illustrative background for Factors affecting elasticity of labour demandIllustrative background for Factors affecting elasticity of labour demand ?? "content

Factors affecting elasticity of labour demand

  • If a firm can easily swap labour for capital (e.g. for machines) - demand will be elastic.
  • If wages only make up a small amount of total cost - demand will be inelastic.
    • Increases in wages won't have much effect on total costs.
  • If wages make up a large amount of total cost - demand will be elastic.
    • Increases in wages can have a great effect on total costs.
Illustrative background for The marginal cost of labourIllustrative background for The marginal cost of labour ?? "content

The marginal cost of labour

  • At point C, the firm should hire more workers as the MRP is above the MC of labour.
  • Point B is the optimal amount of labour employed.
  • At point A, the MRP each worker brings is less than the cost to hire them. This is not optimal.

Shifts in the Demand for Labour

The demand curve for labour will shift for a number of reasons:

Illustrative background for Change in demand for good/serviceIllustrative background for Change in demand for good/service ?? "content

Change in demand for good/service

  • Demand for labour is based on the demand for the good or service being produced by a firm.
    • E.g. the more new cars consumers demand, the greater the number of workers needed to produce them.
  • Demand for labour is called a "derived demand".
Illustrative background for Number of firmsIllustrative background for Number of firms ?? "content

Number of firms

  • An increase in the number of firms producing a product will increase demand for labour.
Illustrative background for TechnologyIllustrative background for Technology ?? "content

Technology

  • Technology can act as a substitute for labour.
    • E.g the introduction of word processing decreased the number of typists needed.
  • But technology can also act as a complement to labour.
    • E.g the increased word processing has led to an increased demand for IT workers.
Illustrative background for EducationIllustrative background for Education ?? "content

Education

  • An increase in workforce education can cause an increase in the demand for labour.
  • This is because greater education means the labour has more skills to offer firms, making them more productive and therefore more valuable.
Illustrative background for Government legislationIllustrative background for Government legislation ?? "content

Government legislation

  • Government regulation can increase or decrease demand for labour.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

Go student ad image

Unlock your full potential with GoStudent tutoring

  • Affordable 1:1 tutoring from the comfort of your home

  • Tutors are matched to your specific learning needs

  • 30+ school subjects covered

Book a free trial lesson