demand for labour

• demand for labour


  how many workers an employer is willing and able to hire at a given wage rate in a given time period

  • businesses employ labour
  • inverse relationship between dL and wage rate
  • higher wage rate - more costly to hire extra employees
  • lower wages - labour becomes relatively cheaper than capital
  • lower wage rate - might create substitution effect and lead to expansion in labour demand
• derived demand


  demand for a factor of production used to produce another good or service

  labour: in factor markets, DL derived from D for output of goods + services

  Strong economy, many businesses looking to hire extra workers to supply higher output
• demand factors determining to employ someone - price + productivity

  objective when deciding to employ - profit maximisation

  decision to employ one additional worker - marginal revenue product of labour
• demand factors determining to employ someone - price + productivity

  objective when deciding to employ - profit maximisation

  decision to employ one additional worker - marginal revenue product of labour
• theory of competitive labour markets


  demand curve for labour comes from estimated marginal revenue product for labour (MRPL)

  MRPL is extra revenue generated when an additional worker is employed

  MRPL = marginal product of labour X marginal revenue (Q X P)
• 1. measuring labour efficiency/productivity can be difficult
  2. collaborative work makes it difficult to establish productivity of individual workers
  3. many people have ability to set their own pay e.g. self-employed and directors of businesses
  4. labour markets for employees such as gov. workers, often little relationship between revenue generated by an employee and the social importance of their roles (e.g. doctors, nurses, teachers etc)
• what causes demand curve for labour to shift

  • rise in final consumer demand -> business needs to take on more workers
  • change in market price of output that labour is making
  • increase in productivity of labour -> labour more cost efficient than capital
  • government employment + subsidy allows business to employ more workers
  • change in cost of capital equipment
• elasticity of labour demand


  measures the responsiveness of demand where there is a change in the wage rate
• factors affecting elasticity of labour demand

  • labour costs as a % of total costs
  • ease and cost of factor substitution
  • PED for final product
  • time period