3.5.1 Demand for Labour

• Factors Affecting Demand and Supply of Labour 


  -Derived demand

  -Non-pecuniary benefits

  -Migration

  -Education and training

  -Income tax and benefits

  -Productivity

  -Capital costs
• Derived Demand


  Demand for a factor of production due to demand for a good or service e.g. demand for houses increased demand for land and builders
• Productivity


  Increased productivity may increase the demand for workers as their marginal revenue product rises so the firm can make more profit, but the firm may demand less as it requires fewer workers to maintain the same output which lowers costs
• Capital Costs


  Capital and labour are substitutes so if capital gets cheaper demand for labour decreases
• Migration


  Inward migration increases the supply of labour so wage costs fall meaning firms are willing to hire more workers, but outward migration causes wages to rise as fewer people have the correct skills.
• Benefits


  Decreasing benefits means unskilled workers may enter the market and increasing taxes may disincentivise people from working however to be eligible for benefits they must prove they are looking for work
• Income Tax


  In 1974, income tax for top earners was 83% this may disincentives some from working and decrease the labour supply, but may incentivise some to work harder to afford their lifestyle thus they supply more labour
• Non-Pecuniary Benefits


  An increase in fringe benefits like a company car, subsidised canteen or company vacations increases the supply of labour as the job is more appealing so wages fall e.g. a teacher
• Education and Training

  Increased education and training increase the elasticity of supply for labour and so demand becomes more elastic as it is easier to find skilled workers. This also increases the demand for labour as firms want the best workers with the best new skills
• Marginal Revenue Product


  The additional revenue a firm gains from employing an extra worker is equal to MPP x MR
• Marginal Physical Product


  The extra output an extra worker produces in the short run. This decreases due to the law of diminishing marginal returns
• Marginal Revenue Product Theory


  MRP=D as it shows how many workers a firm should employ at a given wage rate to gain additional revenue. AC=MC as they operate in a perfectly competitive labour market so are wage takers. At Q1 revenues are maximised as all additional revenue has been made.

  
• Factors Determining Demand for Labour

  • Productivity of labour (MPP)
  • Demand for the end product
  • Wage rate or MC of labour
  • Regulation
  • Improvements in technology
  • Wages in other countries
  • Capital costs