Factors That Influence The Demand for Labour
- The labour market is composed of sellers of labour (households) & buyers of labour (firms)
- Workers supply their labour & firms demand labour
- The demand for labour is a derived demand
- This means that it depends on the demand for goods/services
- If demand for goods/services increases then the demand for labour will increase - and vice versa
Factors That Influence The Demand for Labour
| The price of the product being produced |
The demand for the final product |
- If the selling price of the product increases, it increases the marginal revenue product of labour & the firm will demand more labour
- Higher priced products incentivise firms to supply more (law of supply) & demand for labour will continually increase with increasing prices
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- As demand for labour is a derived demand, when an economy is booming then demand for most goods/services will be high - and the demand for labour will be high
- Conversely, when an economy is in a recession demand for most goods/services will be lower - and the demand for labour will be lower
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| The ability to substitute capital (machinery) for labour |
The productivity of labour |
- Firms will constantly evaluate if it will be possible & more cost effective to switch production from using labour to capital (machinery)
- If it is more cost effective, then demand for labour will fall
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- If the productivity of labour increases (possibly through training) this will lower average costs & firms will likely demand more labour
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