Demand for Labour
Section 1: Understanding Demand for Labour
- The demand for labour is derived from the demand for goods and services; it’s not demanded for its own sake but for what it can help produce.
- Quantity demanded in labour is the total labour hours that employers are willing and able to hire at a particular wage rate.
- Derived demand dictates that a change in the demand for a product will have a consequential change in the demand for labour.
Section 2: Determinants of Demand for Labour
- The wage rate: Higher wages tend to reduce the quantity of labour demanded by firms.
- The productivity of labour: The more productive workers are, the more likely employers are to hire.
- The price of the goods and services that the labour helps to produce: If price rises, it’s more likely that more workers will be employed to increase output.
Section 3: Wage Elasticity of Demand for Labour
- Wage elasticity of demand for labour shows how sensitive the quantity demanded of labour is to changes in wage rates.
- It can be calculated using the formula: Percentage change in quantity of labour demanded / Percentage change in wage rate.
- If wage elasticity of demand is elastic (greater than 1), a change in wage rate leads to a proportionately larger change in the quantity demanded of labour.
- If wage elasticity of demand is inelastic (less than 1), a change in wage rate leads to a less than proportional change in the quantity of labour demanded.
Section 4: Shifts in Demand for Labour
- A rightward shift in the demand for labour could be caused by increased demand for the goods or services, increased productivity, or a technological advancement that makes labour more attractive.
- A leftward shift could be due to decreased demand for the goods or services, decreased productivity, or technological advancements that replace human labour.
Section 5: Understanding the Labour Market
- The labour market, like any other market, is determined by supply and demand. Wage rates will be determined by the interaction of these factors.
- Therefore, the demand for labour is not the only determinant of wage rates; the supply of labour also matters significantly.