FACTORS THAT SHIFTS THE DEMAND CURVE OF LABOUR

Many economic principles that apply to the demand for goods also apply to the demand for labour.

The law of demand also applies to labour in this way: The higher the price (or wage rate), the lower the quantity of labour demanded; the lower the wage rate, the higher the quantity of labour demanded, holding all non-wage rate factors constants.

What are these non-wage rate factors that we hold constants? How do they affect demand?

We will be looking at these factors and how they affect the demand for labour in this post. So, stick around and read carefully 😀

Non-wage-rate factors are factors like changes in demand for output, technology that can cause the various demand curve for labour to shift. Let's look at some of them

Change in demand for output

Labour, as a factor of production, serves as input to produce goods and services(output). Hence, we said the demand for labour is derived.

Thus, a rise in the demand for goods and services will also increase the demand for labour or shift the demand curve for labour outward. 

This is because employers would want to ramp up production and would, therefore, employ more people.

Conversely, a decrease in the demand for goods and services will decrease the demand for labour or shift the demand curve for labour inward. 

The reason is that employers would decrease the demand for labour because of a decrease in the demand for the goods and services that can be derived from the services of labour.

Changes in technology

Technology changes can either serve as a complement to or substitute for labour.

Technology changes act as substitutes for labour when it results in a decrease in the demand for labour.

For example, the availability of internet-enabled computers in school might reduce the demand for physical tutors and therefore, shift the demand curve for tutors leftward.

Technology changes act as a complement to labour when they increase the demand for labour.

If, for example, an increase in the efficiency of word processing software leads to an increase in the demand for typists demanded so that the demand curve for typists will shift outward, then we say that technological change in typists complements the demand for typists.

Technology change can also cause a change in the marginal productivity of labour, which in turn, will either increase or decrease the demand for labour.

Changes in the number of firms

We can derive the demand curve for labour by adding the demand of each of the firms using that kind of labour.

For example, if the number of firms employing software engineers rises, then the demand curve for software engineers shifts outward as more software employees will be employed.

By the same token, the demand curve for software engineers will shift inward if the number of a firm employing software engineers decreases.

Price and availability of other inputs

Inasmuch labour is one of the biggest factors of production, it still isn't the only factor of production.

Hence, the demand for labour may hinge on the price and availability of another factor of production.

To understand this point, we can identify two cases here: complementary factors of production and substitute factors of production.

A factor of production is said to be a complementary factor of labour if it supplements the satisfaction derived from labour.

As an example, consider computers and computer engineers.

No sensible firm will employ a computer engineer if it does not have a computer.

Hence, the satisfaction derived from computer engineers is enhanced by the presence of computers.

The direct implication of this complementary relationship is that a rise in the price of computers may reduce the demand for computer engineers because no firm will employ computer engineers without having a computer. 

Therefore, the demand curve for computer engineers shifts inwards.

Conversely, a fall in the price of computers may increase the demand for computer engineers because firms will buy more computers.

This will mean more computer engineers are employed. As a result, the demand curve for engineers shifts outward.

A factor of production is said to be a substitute for labour if it can be used in place of labour.

A perfect example is robots and assembly, line workers. If robots are available, there will be no need for these assembly line workers. Hence, the demand curve shifts inward.

However, if robots become unavailable or the price rises significantly so that firms can no longer afford them, then more assembly line workers are demanded and the demand curve for assembly line workers shifts outwards.

Education and training.

Demand for labour is invariably dependent on the level of education.

All firms seek to maximize profit and the best way they can achieve this is to increase the productivity of their employees.

Increased productivity of workers, as we have seen in most companies, is achieved primarily through education and training.

A well-educated labour pool means the demand for that labour pool rises since employers seek increased productivity.

On the contrary, an uneducated or untrained labour pool means the demand for that labour pool decreases.

Related posts

Conclusion

Though Change in wage rate is also important in the demand for labour analysis, it can only cause a movement along the same demand curve.

Changes in non-wage rate factors like technology, however, will shift the demand curve.

If you are not familiar with the differences between a movement along the same demand curve and a shift in demand, refer to this post

Meanwhile, I would be expecting your questions in the comment box.marginal productivity of labour

Help us grow our readership by sharing this post

Related Posts

Post a Comment

Subscribe Our Newsletter