The Demand for Labour
Syllabus:
Wage (£/hour)
DL =f(W)
The higher the price of labour (wage per
hour), the less will be employed.
W1
W
D
0 q1 q Q
Derived demand – the demand for labour as a factor of production is dependent on the demand for a product or service.
LONG RUN (when all factors of production are variable)
In the long run the labour demand curve slopes downward because of the substitution effect. Capital can be substituted for
labour if the relative price of capital per unit of output is less than labours.
In the developing world the relative price of labour (L) < capital (K), therefore industries tend to be labour intensive.
In the developed world the relative price of L > K and so industry is capital intensive (rapid advances in technology)
Structural change in the UK has changed the pattern of employment. Jobs in the primary and secondary sector have fallen,
those in the tertiary and quaternary (information services) sector have risen.
Many new jobs have been created in the leisure and tourism industry, as well as IT, business and financial services.
Causes of structural change include:
1. International competition / globalisation based on comparative advantage and NICs
2. Rising incomes – increasing the demand for income elastic services
3. Technological advance - rapid growth of the quaternary sector.
SHORT RUN (when at least one factor of production is fixed)
In the short-run the demand curve for labour slopes downward due to the law of diminishing returns
It is assumed that the capital stock is fixed (factory and office space, plant, machinery and equipment).
More of the variable factor (labour) is applied to the fixed factor (capital) and although, through specialisation and the division
of labour, productivity initially increases, eventually diminishing returns set in and wages have to fall to persuade the employer
to take on an additional worker.
Per week
1 2 3 4 5 6 7
Syllabus:
Wage (£/hour)
DL =f(W)
The higher the price of labour (wage per
hour), the less will be employed.
W1
W
D
0 q1 q Q
Derived demand – the demand for labour as a factor of production is dependent on the demand for a product or service.
LONG RUN (when all factors of production are variable)
In the long run the labour demand curve slopes downward because of the substitution effect. Capital can be substituted for
labour if the relative price of capital per unit of output is less than labours.
In the developing world the relative price of labour (L) < capital (K), therefore industries tend to be labour intensive.
In the developed world the relative price of L > K and so industry is capital intensive (rapid advances in technology)
Structural change in the UK has changed the pattern of employment. Jobs in the primary and secondary sector have fallen,
those in the tertiary and quaternary (information services) sector have risen.
Many new jobs have been created in the leisure and tourism industry, as well as IT, business and financial services.
Causes of structural change include:
1. International competition / globalisation based on comparative advantage and NICs
2. Rising incomes – increasing the demand for income elastic services
3. Technological advance - rapid growth of the quaternary sector.
SHORT RUN (when at least one factor of production is fixed)
In the short-run the demand curve for labour slopes downward due to the law of diminishing returns
It is assumed that the capital stock is fixed (factory and office space, plant, machinery and equipment).
More of the variable factor (labour) is applied to the fixed factor (capital) and although, through specialisation and the division
of labour, productivity initially increases, eventually diminishing returns set in and wages have to fall to persuade the employer
to take on an additional worker.
Per week
1 2 3 4 5 6 7
