Labour Demand

Labour Demand

1. Derived Demand

   • Demand for one item depending on the demand for another item
   • Demand for all FoP is a derived demand- demand depends on the demand for the products they produce
   • Economy expanding- rise in demand for labour providing that rise in output greater than the increase in labour productivity
   • Recession/slowdown AD for labour decline as businesses look to cut their operations costs & scale back on production
   • Recession, Business failures, Plant closures & ST redundancies lead to reduction in derived demand (labour)
   • Fast-growing markets- often strong rise in demand for laboor
   • Aggregate Demand for labour
     • Also a derived demand
     • Depends on level of economic activity
       • Growing economy- firms optimistic that continue grow in future = employment likely to be rising
       • Output declining & firms pessimistic about future = employment likely falling
       • Employment may decrease if economy growing but at slower rate than trend growth rate
     • Advances in tech and improvements in educ/train firms may match higher AD with existing no. of worker or even less
   • Number of workers firm wishes to employ depends on revenue that can be earned
   • Demand rises/ price of product increases firm will employ more workers

2. Firms Demand for Labour

   • Demand & expected demand- for product produced and revenue that can be earned from output
   • Productivity- higher the output per worker the more attractive labour is as resource
     • increase = using labour more cost efficient than using capital equipment
   • Wage Rate- rise in WR above rise in labour productivity wil raise unit labour costs and likely result in contraction in demand.
     • Inverse relationship between demand for labour & WR
       • WR high, more costly to hire extra employees
       • WR low, labour relatively cheaper than capital inputs. fall in WR might create substitution effect- lead to expansion in labour demand
   • Complementary Labour Costs- firms incur other costs when they employ labour
     • E.g. NI contributions rise, demand for labour likely fall
   • Price of Other Factors of Production that can be substitutes or complements - if capital becomes cheaper firms may replace workers by machines
   • Govt employment subsidy allows business to employ more workers
   • Labour demand curve shift inwards during RECESSION when sales of G&S are in decline, business profits falling & many employers cannot afford to keep many workers. Result often labour redundancies & overall decline in demand for labour at each WR.

3. Marginal Revenue Product

   • Marginal Revenue Product (MRP)- the change in a firms revenue resulting from employing one more worker
     • Found by MP X MR
   • Marginal Product of Labour (MPL)- the change in output that results from employing one more worker
     • As more workers employed MPL may increase. Once certain level of employment reached MPL may fall as diminishing returns set in
   • MP theory = demand for any FoP depends on its MRP
   • Quantity of any FoP employed will be determined where MC of employing one more unit = MRP of that factor
   • Perfectly Competitive Market MR = price and will be constant
     • MonComp/Oligopoly/Monopoly- MR falls with output
   • MRP curve shown as downward sloping curve - because if MRP = MCL at 2 points, higher output chosen
     • firm employ Q3 at WR W and Q4 at WR W1
       • MRP (demand curve) will shift out right if MPL&/MR increase
   • EVALUATION
     • Difficult to measure MRP- difficult to isolate contribution one worker makes to changes in output
       • often in teams- difficult to separate contribution made by labour and capital
       • Difficult to measure MP of tertiary sector

4. Elasticity of Demand for Labour

   • Change in WR cause movement along demand curve for labour
   • Elasticity of demand for labour= % change in quantity of labour demanded / % change in WR
     • Employers relatively sensitive to change in WR- demand elastic - change in WR will cause large % change in quantity og labour demanded
     • Measures the responsiveness of demand for labour when there is a change in the ruling market WR.
   • Factors Influencing
     • Price Elasticity of demand for product- if demand for product inelastic demand for labour likely inelastic - because rise in price of product result from rise in WR cause small % fall in demand (output not change as much)- employment not fall significantly
     • Proportion of wage costs in total costs- if wages account for significant proportion of total costs demand elastic-because change in WR have large impact on total costs. If WR fall total costs fall be noticeable amount & demand for labour rise by greater %
     • Ease at which Labour can be substituted by other factors - if easy to substitute capital for labour demand for labour elastic. rise in WR cause workers replaced by machine- demand for labour fall by greater % than rise in WR
     • Elasticity of supply of complimentary factors- if wages fall & easy to obtain more of factor used alongside labour demand for labour will be elastic
     • Time Period- demand for labour more elastic in LR when no time for firms to reorganise their production methods
   • Degrees of Elasticity
     • More flexible country's labour market is, the more elastic demand for labour will be
     • Demand for labour in capital intense industries tends to be inelastic as labour forms small % of industries total costs
       • Demand for labour in labour-intensive industries usually elastic- rise WR like have significant impact on demand for labour due to effects on costs of production, price and product demand
     • Tends to be higher for young & unskilled workers- fall WR may persuade firms to take young inexperienced workers. rise WR likely encourage firms get rid of unskilled workers.
       • Skilled workers more productive more likely have LT contracts & more difficult to replace by capital equipment
       • Demand for unskilled workers not always elastic- because not all low-skill jobs can be automated/filled by unemployed workers
   • Evaluation
     • Influences Unions bargaining strength. more strength when representing labour in inelastic demand. (push for higher wages without endangering employment of members
     • Govt. raising NMW - affect mainly unskilled workers. if demand elastic risk of reducing employment. Providing subsidies- encourage firms to take on unskilled workers- wage elastic likely to have beneficial effects

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