3.5.1 Demand for labour


    a) Factors that influence the demand for labour
    Labour market is a factor market
    Supply of labour is determined by those who want to be employed (employees), whilst demand for labour is from employers
    The demand for labour is affected by:
    The wage rate
    Downward sloping demand curve shows inverse relationship between workers’ wages and number of workers employed
    When wages get higher, firms consider switching production to capital – might be cheaper and more productive than labour

    Demand for products
    Since demand for labour is derived from the demand for products, the higher the demand for the products, the higher the demand for labour.
    Productivity of labour
    The more productive workers are, the higher the demand for them – can be increased with education and training, and by using technology.
    The number of firms in the market:
    Determines how many buyers of labour there is
    If there’s only one employer (E.g. NHS) the demand for labour is lower than if there are many employers (like in the supermarket industry)
    Lower demand for labour means wages are lower, so trade unions try to encourage higher wages

    Substitutes for labour
    If labour can be replaced for cheaper capital, then the demand for labour will fall. This will shift demand in

    How profitable the firm is:
    The higher profits of the firm, the more labour they can afford to employ
    A change in market price of output labour is making
    A government employment subsidy allows business to employ more workers
    These can cause shifts in labour demand

    b) Demand for labour as a derived demand
    Labour is derived demand
    Means the demand for labour comes from the demand for what it produces
    • E.g. the demand for people who make cars is derived from the demand from cars • With no demand for cars, there will be no demand for car manufacturers.
    Demand is related to how productive labour is and how much the product is demanded
    • The elasticity of demand for labour is linked to how price elastic demand for the product is
    Wage rate will lead to movements along the supply and demand curves for labour
    All other factors will shift the curves

    Marginal Revenue Product of Labour
    In competitive labour markets, demand curve for labour comes from estimated marginal revenue product of labour (MRPL)
    MRPL is extra revenue generated when an additional worker is employed
    Formula for MRPL = marginal product of labour x marginal revenue
    Marginal Revenue Product Calculation
    Assuming firms employing labour are operating competitive market so each unit of output generates revenue of $20
    Firms (profit maximisers) will choose a level of employment that maximises profit
    MRPL falls when diminishing returns set in

    If each worker employed costs the firm $160 a day = this is the marginal cost of labour
    At wage rate of $60 – firm should employ 6 workers
    Profit maximising firm should employ workers up to the point where MRPL = MC
    When 6 people are employed MRPL ($160) = MC ($160)
    Employing a 7th worker would lead to a fall in total profits
    MRPL problems
    Measuring labour efficiency / productivity can be difficult
    • Relatively easy to measure productivity in the construction industry and in call-centres • Much harder to measure productivity in consultancy, education • Collaborative work makes it difficult to establish productivity of individual workers
    Many products are result of inputs drawn from different countries – each contributing to value added (e.g. iPhone has parts made from more than 200 manufacturers)
    Many people have ability to set their own pay e.g. the self-employed and directors of businesses





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