3.5.1 Demand for Labour

Question 1

Explain the demand for labour?

Answer 1

• The demand for labour shows how many workers an employer/business is willing and able to hire at a given
  wage rate in a given time period.
• There is normally an inverse relationship between demand for labour & the wage rate.
• If the wage rate is high, then it becomes costly for a business to hire extra employees.
• When wages are lower, labour becomes relatively cheaper than capital. A fall in the wage rate might therefore
  create a substitution effect and lead to an expansion in labour demand.

Question 2

What does the contraction and expansion of labour demand on the wage rate diagram look like?

Answer 2

Question 3

What does a movement along the labour demand curve mean?

Answer 3

A change in the wage rate

Question 4

What does a shift in labour demand mean and what does it look like?

Answer 4

A change in factors other than wage rate

Question 5

What do the causes of shifts include?

Answer 5

1. A rise in consumer demand which means that a business needs to take on more workers
2. A change in the price of the product that labour is making which affects revenues for the employer
3. An increase in the productivity of labour which makes labour more cost efficient than capital
4. An employment subsidy or tax incentive which cuts costs and allows a business to employ more workers
5. A change in the price of new capital equipment (a substitute for labour)

Question 6

Explain derived demand

Answer 6

Derived demand is the demand for a factor of production used to produce another good or service.
* When the economy is growing strongly, many businesses will be looking to hire extra workers to supply
increased output.
* During a recession or a prolonged economic slowdown, demand for labour tends to fall causing a rise in
cyclical unemployment.

Question 7

What is a good example of cyclical unemployment?

Answer 7

The construction industry is a good example of a sector where employment is cyclical. When demand for new buildings
is growing quickly, there will be an expansion of demand for many different types of jobs within the industry. However,
in a cyclical downturn, construction employment is likely to fall.

Question 8

What is the elasticity of demand for labour?

Answer 8

Elasticity of labour demand measures the responsiveness of demand for labour after a change in the wage rate

Question 9

Explain what elasticity of demand for labour depends on

Answer 9

1. Labour costs as a % of total costs: When labour expenses are a high % of total costs, then labour demand is
   more wage elastic.
2. Ease and cost of factor substitution: Labour demand is more elastic when a firm can substitute easily and
   cheaply between labour & capital inputs.
3. Price elasticity of demand for the final product: This determines whether a firm can pass on higher labour
   costs to consumers in higher prices. If demand is inelastic, higher costs can be passed on.
4. Time period: In the long run it is easier for firms to switch factor inputs e.g. bring more capital in perhaps
   replacing labour.

Question 10

Show what elastic and inelastic labour demands look like?

Answer 10