Labour Market

• Product market


  Households demand goods and services, and firms supply them
• Factor market


  Firms demand resources such as labour and they are supplied by households who own these resources
• Wage rate


  The price of labour
• Wage rate is determined by the intersection of demand and supply for labour
• Labour Demand


  The amount of labour that firms are able and willing to deploy at the given wage, ceteris paribus
• Labour demand curve


  • Downward sloping
  • Rise in wage rate, ceteris paribus, causes the quantity of labour demanded to fall
  • This suggests that individual firms in this labour market want to employ fewer workers at higher wage rates
• Factors affecting Labour Demand

  • Changes in the Production of Goods and Services
  • Productivity of labour
  • Technology
  • Changes in the price of other Factor Inputs
  • Govt policies
• Changes in Demand for the Product

  When demand increases in the product market the demand for the labour would also increase, causing the labour demand curve to shift
• Changes in Demand for the Product

  • Healthcare workers and nurses
• Changes in Supply of the product

  When supply increases in the product market, the demand for labour will also increase since labour is needed to produce the additional goods and services
• Changes in Supply of the product


  • Assembly workers and car mechanics
• Productivity of labour


  One measure of productivity is output per worker. Given that there is a rise in the output per worker, it would mean lower production costs for the firm, especially if wages are unchanged. The lower cost of production would lead to a rise in the supply of goods and services. To produce more goods, the firms would demand more workers. Hence increasing productivity will lead to greater demand for labour.
• Factors influencing labour productivity

  • Skill levels
  • Education and training
  • Use of technology
• Technology


  When technology acts as a substitute to labour, it replaces the need for the number of workers an employer needs to hire. When technology acts as a complement to labour, it will increase the demand for certain types of labour.
• Technology as a substitute

  • Self-check-out machines in supermarkets leading to falling demand and unemployment for cashiers
• Technology as a complement

  • Increased use of word processing and other software increasing demand for IT professionals
• Complementary factor input


  One that must be used together with another input (eg. labour) in the production process
• Complementary factor input


  • Steel and labour in the automobile industry
• Substitutable factor input


  One that can be used instead of a particular type of input (ie. labour)
• Substitutable factor input


  • Capital machinery such as self-checkout counters
• Government policies affecting labour demand

  • Subsidising Consumption
  • Subsidising Production
  • Subsidising Wages
  • Foreign Worker Levy
• Subsidising Consumption


  Subsidising the consumption of goods and services such as healthcare and education would lead to a higher demand for these goods and services, leading to a rise in the equilibrium output and hence an increase in the demand for labour
• Subsidising Production


  When the government provides subsidies to firms, it lowers the firm's production cost, leading to a rise in the supply of goods and hence an increase in the equilibrium output, leading to an increase in the demand for labour
• Subsidising Wages


  This essentially lowers the price of labour and could lead to firms preferring to use more labour instead of capital, leading to a rise in demand for labour
• Foreign Worker Levy


  Increase in Foreign worker levy increases cost of employing foreigners, leading to a fall in demand for foreign workers
• Labour Supply


  The amount of labour that people are able and willing to provide at the given wage, ceteris paribus
• Labour supply curve


  • Upwards sloping
  • Rise in the wage rate, ceteris paribus, causes the quantity of labour supply to rise
  • The higher the wage, the more labour is willing to work and forgo leisure activities
• Factors affecting Labour Supply

  • Changes in Labour Force
  • Changes in the Size and Composition of Qualified Workers
  • Government Policies
• Changes in Labour Force

  Immigration will increase the supply of labour in a country. Population growth increases supply of labour. An ageing and retiring population will decrease the supply of labour. More women entering the labour force increases the supply of labour.
• Changes in the Size and Composition of Qualified Workers

  If the number of qualified workers rises, the labour supply curve will shift rightward
• Government Policies affecting Labour Supply

  • Changing the Qualification for certain jobs
  • Provision of Subsidies for Education and Training
  • Changing the incentive to work
  • Adjusting the Retirement Age
  • Immigration Policies
• Wage elasticity of demand

  Measures the responsiveness of quantity demanded for labour due to a change in wage rate, ceteris paribus
• Factors affecting Wage Elasticity of Demand


  • Availability of Substitutes
  • Proportion of Labour Cost in Total Cost
  • Price elasticity of demand for final good or service
• Wage elasticity of supply


  Measures the responsiveness of quantity supplied of labour due to a change in wage rate, ceteris paribus
• Factors affecting Wage Elasticity of Supply

  • Skills and Education Level
  • Time period
• Wage Elastic


  The supply or demand is highly responsive to changes in wage rate
• Wage Inelastic


  The supply or demand is not very responsive to changes in wage rate