Demand for Labour by Individual Firms

• Labour - A Derived Demand


  The demand for labour is derived from the demands for goods and services within the economy. Labour is demanded only because it is needed for the firm to produce goods and services and make a profit.
• Output of the Firm

  The single most significant influence on a firm's demand for labour is its level of output. If a firm is experiencing higher sales, it will increase production and increase demand for labour.
• General Economic Conditions - Aggregate Demand


  Changes in demand for labour correlate with changes in the business cycle
• Conditions in the Industry

  Any changes in the pattern of consumer demand will affect the pattern of demand for labour.
• Demand for a Firm's Individual Product

  A firm's output is ultimately determined by its effectiveness in selling its goods in the workplace
• Productivity of Labour


  Firms must determine how they will organise their production which involves choosing between labour or capital more intensively in production.

  • Overall effect of an increase in productivity on demand for labour is dependent on the level of aggregate demand (short-term)
  • High labour productivity makes labour a more attractive input to production
• Cost of Other Inputs

  Labour

  • If costs are relatively high, firms will opt for capital
  • If labour costs fall, firms may shift back towards a greater use of labour.
  • A firm's demand will be more elastic
• Cost of Other Inputs

  The cost of capital is represented by several factors

  • Interest rates: Represent cost of borrowing funds to purchase new capital equipment.
  • Structure of the tax system: Any special tax allowances that may encourage greater business investment
• Cost of Labour & Capital Overseas

  Demand for labour will be influenced by cost and productivity of foreign labour.

  • Firms may consider shifting operations overseas if they are cheaper elsewhere
  • Firms may close local operations and shift production overseas if cheaper