3.5.1 Demand for labour

Question 1

The economically active population

Answer 1

The people in an economy who are capable of, and old enough to work.

Question 2

Derived demand

Answer 2

The demand for labour is driven by the demand for the goods that this labour would provide

• When demand for these goods increases, so does the demand for labour.
• When demand for goods decreases, the derived demand for labour also decreases, resulting in unemployment.

Question 3

Potential reasons for a shift in the demadn curve of labour

Answer 3

• A change to the price of goods sold – if demand falls for a firm’s product and its price falls, this would decrease the firm’s demand for labour. Curve would shift left.
• Factors that affect labour productivity – e.g. if new technology or training increases the productivity of workers, this would increase the demand for labour. Curve would shift to the right.
• Increases to the costs of labour – the cost of labour doesn’t only include wages. It also includes costs such as training, uniforms, safety equipment, and National Insurance contributions. If any of these labour costs increased, this would decrease the demand for labour. Curve would shift to the left.

Question 4

Marginal cost of labour

Answer 4

The cost of hiring one additional worker.

Question 5

Marginal revenue product of labour

Answer 5

The extra revenue gained by the firm from employing one more worker.

Question 6

How does the MRP affect how many workers the firms employ?

Answer 6

Firms will only hire workers if they add more to a firm’s revenue than they add to its costs.

Question 7

Elasticity of demand for labour

Answer 7

The sensitivity of demand for labour when the wage level changes.

Question 8

How is the elasticity of demand for labour calculated?

Answer 8

Dividing the percentage change in the quantity divided of labour by the percentage change in the wage rate.

Question 9

Factors influencing the elasticity of demand for labour

Answer 9

• Time: It is always more elastic in the long run as firms can make plans for the future.
• Substitutes: If labour can be substituted easily by capital then the demand is more elastic.
• Proportion of a firm’s total costs: The demand will be inelastic because a wage increase will have little impact on total costs.
• PED of product made: The more price elastic the demand for a product, the more elastic the demand for labour will be (because labour is derived demand).

Question 10

Generally, a firm’s demand for labour will …. if wages rise

Answer 10

Decrease

• However, this depends on whether the wage increase is accompanied by an increase in productivity (the output per worker per hour).

Question 11

Unit labour costs

Answer 11

The labour costs per unit of output.

Question 12

What do high unit labour costs suggest about an economy?

Answer 12

There is low productivity (which would reduce a country’s international competitiveness).