4.1.6. The Labour Market
The Demand for Labour, Marginal Productivity Theory
• The demand for labour is derived from the demand for the product/service they are used to make-
strongly dependent on consumer demand for the final product
THE MARGINAL PRODUCTIVITY THEORY OF THE DEMAND FOR LABOUR
• The demand for labour depends on the addition to total revenue that employing one extra unit will cause-
MARGINAL REVENUE PRODUCT
◦ Consists of two factors
‣ MARGINAL PHYSICAL PRODUCT (MPP)- Extra output that an extra worker produces- generally
diminishes
‣ MARGINAL REVENUE- Revenue a firm gains from selling the last unit of output, closely related to
the price
◦ MRP=MPP x MR
The Demand Curve for a Firm and the Industry as a whole:
To maximise profits, the firm will employ at the equilibrium where MRP=MC
EVALUATION OF MRP
1) Difficult to measure labour efficiency/productivity, particularly in industries such as education
2) Team or Collaborative work makes it harder to measure productivity of individual workers as they are
interdependent on one another
3) Many people have the ability to set their own pay, e.g. Self-employed
, DEMAND FOR LABOUR
• Shows how many workers an employer is willing and able to hire at a given wage rate in a given time
period
• Inverse relationship between demand for Labour and wage rate
• E.g. a fall in the wage rate might create a substitution effect and lead to an expansion in labour demand
Factors Affecting a Firm's Demand for Labour
◦ Price of labour (WR)- movement along the demand curve
◦ Increased productivity of labour- makes labour more cost effective than capital, leading to a change
in MPP
◦ Changes in market price of product (MR)
◦ Changes in prices of other CELL, e.g. through technological improvements
◦ Employment subsidies from gov
◦ Rise in consumer demand for a product (derived demand)
Elasticity of Demand for Labour
◦ %Change in QL/%Change in Wage Rate
• Factors influence LED
◦ Time- longer time period=more elastic
◦ Ease and Cost of Labour-Capital Substitution- Easier=more elastic
◦ PED of product- Elastic=Elastic
◦ Proportion of Labour Costs to Total Costs- Higher the proportion, more elastic
Influences upon the Supply of Labour to Different Markets
• The quantity of labour that a worker is willing to and able to supply at different hourly wage rates
MONETARY FACTORS AFFECTING SUPPLY OF LABOUR- causes movements in supply curve
1) Wages
2) Bonuses
3) Overtime Pay
4) Performance related pay
NON-MONETARY FACTORS AFFECTING SUPPLY OF LABOUR (Job Satisfaction)- Causes shifts in supply
curve
1) Risk of losing job
2) Future career opportunities
3) Occupational pensions
4) Quality of in-work training
5) Terms of Contract/Working conditions
6) Working during social/anti-social hours
• The supply of labour shows the relationship between the wage rate and the number of workers willing to
work in an occupation
◦ If wages rise, workers enter the industry attracted by incentive of higher pay
◦ IDO Elasticity of supply
The Demand for Labour, Marginal Productivity Theory
• The demand for labour is derived from the demand for the product/service they are used to make-
strongly dependent on consumer demand for the final product
THE MARGINAL PRODUCTIVITY THEORY OF THE DEMAND FOR LABOUR
• The demand for labour depends on the addition to total revenue that employing one extra unit will cause-
MARGINAL REVENUE PRODUCT
◦ Consists of two factors
‣ MARGINAL PHYSICAL PRODUCT (MPP)- Extra output that an extra worker produces- generally
diminishes
‣ MARGINAL REVENUE- Revenue a firm gains from selling the last unit of output, closely related to
the price
◦ MRP=MPP x MR
The Demand Curve for a Firm and the Industry as a whole:
To maximise profits, the firm will employ at the equilibrium where MRP=MC
EVALUATION OF MRP
1) Difficult to measure labour efficiency/productivity, particularly in industries such as education
2) Team or Collaborative work makes it harder to measure productivity of individual workers as they are
interdependent on one another
3) Many people have the ability to set their own pay, e.g. Self-employed
, DEMAND FOR LABOUR
• Shows how many workers an employer is willing and able to hire at a given wage rate in a given time
period
• Inverse relationship between demand for Labour and wage rate
• E.g. a fall in the wage rate might create a substitution effect and lead to an expansion in labour demand
Factors Affecting a Firm's Demand for Labour
◦ Price of labour (WR)- movement along the demand curve
◦ Increased productivity of labour- makes labour more cost effective than capital, leading to a change
in MPP
◦ Changes in market price of product (MR)
◦ Changes in prices of other CELL, e.g. through technological improvements
◦ Employment subsidies from gov
◦ Rise in consumer demand for a product (derived demand)
Elasticity of Demand for Labour
◦ %Change in QL/%Change in Wage Rate
• Factors influence LED
◦ Time- longer time period=more elastic
◦ Ease and Cost of Labour-Capital Substitution- Easier=more elastic
◦ PED of product- Elastic=Elastic
◦ Proportion of Labour Costs to Total Costs- Higher the proportion, more elastic
Influences upon the Supply of Labour to Different Markets
• The quantity of labour that a worker is willing to and able to supply at different hourly wage rates
MONETARY FACTORS AFFECTING SUPPLY OF LABOUR- causes movements in supply curve
1) Wages
2) Bonuses
3) Overtime Pay
4) Performance related pay
NON-MONETARY FACTORS AFFECTING SUPPLY OF LABOUR (Job Satisfaction)- Causes shifts in supply
curve
1) Risk of losing job
2) Future career opportunities
3) Occupational pensions
4) Quality of in-work training
5) Terms of Contract/Working conditions
6) Working during social/anti-social hours
• The supply of labour shows the relationship between the wage rate and the number of workers willing to
work in an occupation
◦ If wages rise, workers enter the industry attracted by incentive of higher pay
◦ IDO Elasticity of supply
