Demand for Labour

Demand for labour is derived. This is because it is demanded for what it can produce, rather than for the thing itself.

What determines the demand for Labour

• Demand / Expected demand for a product / service
• Productivity of a worker
• Wage rate / price of labour
• Complementary labour costs, such as National Insurance and pensions
• Substitutes, such as capital

MRP - Measuring demand for Labour

MRP is the change in total revenue from employing one extra worker.

\(\text{MRP} = \text{Marginal Product} \times \text{Marginal Revenue}\)
\(\text{MRP} = \text{Productivity} \times \text{Price}\)

Factors that influence MRP

MRP for a single firm

MRP for an industry

MRP can shift due to two factors:

By MP - Training and development to improve productivity
By MR - Change in price of product being produced

WED - wage elasticity of demand

Wage elasticity measures how response demand for labour is to a change in wage.

\(WED = \frac{\%\Delta\text{ in DL}}{\%\Delta\text{ in W}}\)

Inelastic - Rising wages will not greatly impact on the demand for labour
Elastic - Rising wages will have a large impact on the demand for labour

Factors that affect WED

• Ease of substitution for capital
• Elasticity of the product, since it is a derived demand
• Proportion of labour cost in relation to total cost. If a high proportion of total cost is labour, it is more likely for demand for labour to be elastic.
• Time

Inelastic WED - Pilot

Pilot's WED is inelastic because they are difficult to replace with capital -> People would not fly in a plane without a pilot. Additionally, they are a necessity for airlines, so they will raise prices rather than shutdown.

Elastic WED - Cashier

Cashier's WED is elastic because they can easily be replaced with capital (self-checkouts).