Demand for Labour
Definition
Demand for labour: the quantity of workers that firms are willing and able to employ at each wage rate over a given period.
The Wage Rate
- The wage rate is the price a firm pays to employ labour.
- A higher wage rate raises the cost of each worker relative to output → the quantity of labour demanded falls.
- A change in the wage rate causes a movement along the demand curve, not a shift.
Example
- A factory paying £10 an hour employs 100 workers.
- If the wage rises to £15 an hour, the firm cuts back to 70 workers to control costs.
- The firm moves up along its existing labour demand curve; the curve itself does not shift.
Demand and Price of the Product
- Labour demand is derived, so it depends on the demand for the good the labour produces.
- A rise in the product's price makes each worker's output more valuable, raising the revenue a worker earns the firm.
- So higher product demand or price shifts the labour demand curve to the right.
Productivity of Labour
Definition
Labour productivity: output produced per worker per period.
- More productive workers add more output and revenue for each £1 of wage, so each worker is more profitable to employ.
- So higher productivity raises the demand for labour and shifts the curve rightward.
Example
- Training lifts output per worker from 8 to 12 units an hour.
- A 50% rise in output per worker makes each worker more profitable, so the firm hires more at any given wage.
Price of Other Factors
- Firms can often substitute between labour and capital.
- If the price of a substitute factor such as machinery falls, firms replace workers with machines → labour demand falls.
- If labour is used alongside a complementary factor, a cheaper complement lowers total production cost → labour demand rises.
- Cheaper delivery vehicles, for example, can raise a firm's demand for drivers.
- Whether cheaper capital cuts labour demand depends on how easily machines can do the specific task.
Key Idea
- The wage rate moves the firm along its labour demand curve.
- Product demand and price, productivity, and the price of other factors shift the whole curve.
Exam technique
- Separate the wage rate, which causes a movement, from the other factors, which cause shifts.
- Link each shift factor back to the value of what a worker produces.
Common Mistake
- Do not say a wage change shifts the labour demand curve, because it is a movement along it.
- Do not confuse a substitute factor with a complementary factor when a factor price changes.
Self review
- Define the demand for labour.
- How does a rise in the wage rate affect the quantity of labour demanded?
- Why does higher productivity increase the demand for labour?
- Give one factor that shifts the labour demand curve and explain its effect.
