3.5.1 Demand for labour Flashcards
Demand for labour
The demand curve for labour shows the quantity of labour that employers would wish to hire at each possible wage rate
Derived demand
Firms hire workers in order to produce goods to meet their aim, usually of making a profit. Therefore, the demand for labour is derived demand as it is derived from demand for the product the labour produces. Businesses only want the worker for as long as people are willing and able to buy the product they produce.
Factors influencing demand for labour
- Wage rates
- Demand for the product
- Prices of other factors of production
- Wages in other countries
- Technology
- Regulation
Wage rates
A wage is the price of labour and so has the same influence on demand for labour as price has on the demand for a product.
As wage rates increase, demand for labour contracts since the MRP of labour must be higher for it to be worthwhile employing more people, so less people are employed.
Demand for the product
Since labour is a derived demand, if there is no demand for the product, there is no demand for the labour. Firms won’t employ people if the goods they make aren’t going to be sold and make a profit. An increase in demand for the product leads to an increase in demand for labour. This is linked to the concept of MRP: an increase in output or price of a good will increase demand for the labour that produces that good.
Prices of other factors of production
If machinery and equipment becomes cheap, people will switch labour for machinery and therefore the demand for labour will fall.
Wages in other countries
If wages are lower in other countries and therefore wages in the UK are relatively high, people will be employed in other countries as it represents a lower cost for businesses. This means that demand in the UK is low.
Technology
Improvements in computers and technology means that many jobs have been lost with the work being done by machines. This means that there is less demand for labour, but demand for labour in technological based industries is increasing.
* By 2040, about 47% of jobs could be lost to technology.
Regulation
As laws are passed some jobs disappear, such conductors, whilst other jobs are made. High regulation within the labour market is likely to discourage firms from hiring since it can be very costly and time-consuming so this will reduce demand for labour in these areas.
* France is a country that used to have high levels of labour regulation and this is something the new president, Emmanuel Macron, is trying to change.
Price Elasticity of Demand for labour
The responsiveness of the quantity demanded of labour to the wage rate
Factors influencing PED of labour
- PED for the product
- Proportion of wages to the total cost of production
- Substitutes
- Time
PED for the product
It is directly correlated to the price elasticity of demand for the product the labour produces. If the good is elastic, then a rise in wages and hence a rise in prices for consumers will have a large impact on the quantity the business sells. This will mean that the business will reduce the number of people it employs, in order to help it make a profit.
Proportion of wages to the total cost of production
It is affected by the proportion of wages to the total cost of production: if wages are a huge proportion of costs, then an increase in wages will increase costs massively and so there will be a large fall in demand for labour hence it will be elastic
Substitutes
If there are many substitutes, such as machinery and labour in other countries, then the demand will be elastic. This means high skilled jobs tend to be more inelastic than low skilled jobs as the labour cannot be easily replaced.
Time
In the long run, it is more elastic as machinery can be developed and jobs can be moved whilst in the short run firms have to employ workers and redundancy payments can be expensive.
