5.1 Demand for Labour

• Labour market


  A factor market where the supply of labour is determined by those who want to be employed (the employees), whilst the demand for labour is from employers
• Derived demand


  The demand for labour comes from the demand for what it produces
• Demand for labour


  Related to how productive labour is and how much the product is demanded
• Elasticity of demand for labour


  Linked to how price elastic the demand for the product is
• Nominal wages


  The monetary value of wages
• Real wages


  Wages adjusted for inflation
• Factors affecting the demand for labour


  • Wage rate
  • Demand for products
  • Productivity of labour
  • Substitutes for labour
  • How profitable the firm is
  • The number of firms in the market
• Wage rate


  The downward sloping demand curve shows the inverse relationship between how much the worker is paid and the number of workers employed
• Higher wages


  Firms might consider switching production to capital, which might be cheaper and more productive than labour
• Demand for products


  The higher the demand for the products, the higher the demand for labour
• Productivity of labour


  The more productive workers are, the higher the demand for them. This can be increased with education and training, and by using technology
• Substitutes for labour


  If labour can be replaced for cheaper capital, then the demand for labour will fall
• Profitability of the firm

  The higher the profits of the firm, the more labour they can afford to employ
• Number of firms in the market


  Determines how many buyers of labour there is. The lower the demand for labour, the lower the wages
• Elasticity of demand for labour

  Measures how responsive the demand for labour is when the market wage rate changes
• Factors affecting the elasticity of demand for labour


  • How much labour costs as a proportion of total costs
  • The ease of substituting factors
  • The price elasticity of demand for the product
• Productivity


  Calculated by output per worker per period of time. Can be increased by training workers or using more advanced capital machinery
• Unit labour cost


  How much labour costs per unit of output
• Lower unit labour costs


  Makes a country more internationally competitive
• Higher productivity


  Lowers unit labour costs
• Income effect


  As incomes rise, people choose to partake in more leisure time because it is deemed more affordable
• Substitution effect


  When the wage rate passes a certain amount, people choose to take more leisure time, which is a substitution for working longer hours
• Higher wages


  Lead to fewer hours worked due to the income and substitution effects