Demand of Labour

The demand for labour is the quantity of labour that firms are willing and able to hire at a given wage rate. It is a derived demand and depends primarily on two sets of factors: the marginal revenue product (MRP) of labour and the cost of labour.

If the market demand curve for a product is downward sloping, more output can be sold only if the selling price is lowered. The decision on how much labour to use is based partly on the productivity of labour, but also on the cost of labour (its price).

Therefore, the demand for labour is influenced by factors affecting either the MPP or the MR:

• Productivity (MPP):

  • Education and Training: Higher skilled workers generally have a higher MPP (they produce more output), increasing the demand for their labour.

  • Technology and Capital: Better tools, machinery, and technology increase the output per worker (MPP), thereby increasing the demand for labour, particularly for skilled labour.

  • Working Practices: Improvements in management, organizational efficiency, and motivation can raise MPP.

• Demand for the Final Product (MR):

  • If the demand for the final good or service the firm produces increases, the firm can sell more output at a higher price, increasing its Marginal Revenue (MR).

  • An increase in MR directly leads to a higher MRPL​ and therefore a higher demand for labour. Conversely, a recession or fall in consumer demand will reduce MR and thus reduce the demand for labour.

Factors Influencing the Cost of Labour (Non-Wage Costs)

A firm's decision to hire is based on the total cost of employment, not just the wage rate.

• Non-Wage Costs: These include national insurance contributions, pension contributions, health insurance, and training costs. An increase in non-wage costs raises the total cost of labour, decreasing the demand for labour.

• Wages in Other Markets: If wages in competing labour markets rise, a firm may have to increase its own wage offer to attract and retain workers, effectively shifting the firm's demand curve for labour inward.

• Subsidies and Taxes: Government subsidies for employing certain types of workers (e.g., apprentices) lower the effective cost of labour, increasing demand. Taxes on employment have the opposite effect.

Price of Substitutes (Capital)

• Price of Capital: Labour and capital (machinery/technology) are substitutes in many production processes.

  • If the price of capital falls (e.g., cheaper robots), firms may choose to substitute capital for labour (labour substitution effect), decreasing the demand for labour. This is particularly true for unskilled, routine jobs.

  • If the price of capital rises, the demand for labour is likely to increase.

Demand for Labour as a Derived Demand

• The demand for labour is a derived demand because it is not demanded for its own sake, but rather for the contribution it makes to the production of final goods or services.

• The demand for workers in a specific industry (e.g., car manufacturing) is derived from the demand for the final product (cars).

Significance

• Direct Link to Consumer Demand: The sensitivity of the demand for labour to changes in consumer tastes and the economic cycle is high. A recession leading to a fall in consumer spending on houses will immediately cause the demand for construction workers to fall, regardless of changes in their wage rate.

• Vulnerability to Market Changes: Industries that experience volatile demand for their final product (e.g., luxury goods) will also experience volatile demand for their labour.

• Technological Impact: If a new technology makes the final product obsolete or significantly changes the production process, the demand for the labour used to create the old product can collapse. For example, the decline in demand for physical photographic film led to a significant fall in demand for film processing lab workers.