Labour market

The demand for labour

The amount that firms are willing to pay for a certain amount of workers

What the price of workers is also known as

The wage

The relationship between labour demand and wages

An inverse relationship

• As wages increase, labour demand decreases

What influences the demand for labour

• Worker productivity

• Cost of capital

• Labour costs as a percentage of total costs

• Level of consumer demand for the product being made

Derived demand

When demand for a factor of production, or good and service occurs as a result of demand for another intermediate or final good.

• For example, as consumer demand for a product rises, the demand for labour (to make that product) rises

Worker productivity and its influence on the demand for labour

When workers are more productive and output is more efficient, firms may be prepared to pay workers more.

The cost of capital and its influence on the demand for labour

Firms can choose to use capital if it’s cheaper, more efficient or more reliable.

It acts as a substitute.

The level of consumer demand for the product being made and it’s influence on the demand for labour

The more consumer demand, the more MRP, which means firms can afford to increase wages as long as they stay below MRP.

MRP

Marginal revenue product

• The extra output produced by a worker multiplied by the revenue (price of output) it makes

MP

Marginal product

• The extra output produced by a worker

Labour costs as a percentage of total costs and its influence on the demand for labour

the demand for labour is less elastic when labour costs overall are small, so workers in a nuclear reactor, for example, can earn more than workers on a clothes production line

The supply of labour

The number of workers willing and able to work at any given wage

The relationship between the supply of labour and wages

A direct relationship

• More people are willing to work, and for longer hours, when wages rise

Influences on the supply of labour

• The quality of education and training

• Migration

• Income tax, and out of work benefits

• The strength of trade unions

• The opportunity cost of leisure (the next best alternative for workers)