Demand for labour Flashcards
What is demand for labour an example of?
Derived demand(indirect demand)- firms/employers demand labour for the goods and services they can produce, and which can be sold in the market: employees/workers supply labour in the market
What is demand for products an example of?
Direct demand
Relationship between demand for labour and market wage rate
There is usually an inverse relationship between demand for labour and the market wage rate.
If the wage rate is high, then it’s more costly for a business to hire extra employees(impacts businesses’ maximisation of profit). This is seen, as of January 2025, where businesses are cutting jobs at the fastest pace since the financial crisis, excluding the pandemic, as rising costs reignite stagflation fears in the British economy.
When wages are lower, labour becomes relatively cheaper than capital. A fall in the wage rate might then create a substitution effect between labour and capital, and lead to an expansion in labour demand - firms take on more workers
Gig economy characteristics
Low wages, workers are only employed when they’re needed -zero hours contract: Deliberately undermines the welfare of workers
Trade unions -
Organisations representing the interests of workers, are there to counteract the behaviours of firms in a Gig economy
Unemployed-
Are actively looking for work, but can’t find it
Examples of firms operating in a gig economy on UK
UBER, Deliveroo, Just Eat
Evidence of economic inactivity
2025- 22% of the able workers in the UK are choosing to be economically inactive(are the worst form of free riders - as they still use public goods)
Economically inactive people-
Someone choosing not to look for work, but also not asking for any benefits either. The government are extending the retirement age, with the pressure on the government due to more people becoming economically inactive.
How do unemployed people survive?
They go to the job centre to ask for benefits, where they require proof you’ve actively been looking for work for a month-2 weeks(rejection evidence).
How consumer demand impacts demand for labour?
If consumer demand for a particular product increases, firms will need to hire more workers to produce that product.
Factors causing shifts in labour demand for an industry
A rise/fall in consumer demand, which means a business needs to take on more workers.
A change in the cost of capital equipment e.g.the effects of robotic techniques and artificial intelligence
An employment subsidy, which cuts labour costs and thus allows a business to employ more workers
Marginal revenue product of labour
The extra revenue generated when an additional worker is employed
Marginal revenue product of labour=
Marginal product of labour x marginal revenue
Profit maximising level of output
This theory assumes competitive labour markets and competitive product markets where the final price of output is the same, so AR= MR.
A profit maximising firm should employ workers up to the point where the marginal revenue product of labour = the marginal cost of labour.
Limitations of the MRPL concept
MRPL is taken as the basis for the labour demand curve, but:
Measuring labour efficiency/productivity can be difficult.
Harder to measure productivity in consultancy, education.
Collaborative work makes it difficult to establish the productivity of individual workers.
Factors on workers’ productivity
Motivation
Money
Level of education e.g. the UK is too wedded to academia, so don’t train their workforce sufficiently for employability skills
Wage elasticity of labour demand
Measures the responsiveness of demand for workers when there’s a change in the wage rate
Factors impacting wage elasticity of labour demand
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 and capital inputs.
3) Time period: In the long run, it’s easier for firms to switch factor inputs e.g. bring more capital in perhaps replacing labour.
Factors influencing demand for labour in an industry like construction:
1) Price of the good or service: The higher the price of the final product, the more profitable it is for firms to produce it, and the more labour they will demand. Linked to economic growth.
2) Productivity of labour: The more productive workers are, the more output they can produce per hour, and the more labour firms will demand. Linked to marginal revenue production theory.
3) Cost and availability of substitutes: If there are good substitutes for labour, such as robotics, firms will be less likely to demand labour at a given wage. Cost of substitution is also important.
Impact of robots/artificial intelligence on demand for labour
These technologies have the potential to replace human workers in a variety of occupations. For example, Al is being used to develop self-driving cars and trucks, which could reduce the need for human drivers.
Positive effects on labour demand of technologies such as artificial intelligence
1) Derived demand: Al will create new jobs for engineers, programmers and technicians.
2) Al might allow smaller businesses to thrive and grow as they benefit from easily accessible technologies.
3) Al might create new markets and industries, such as developing new medical treatments and creating new forms of entertainment.
