Every factor of production gets remuneration for its contribution in the process of production. Labour gets wages and salaries which are determined by the forces of demand for labour and supply of labour. Like all other factors labour has a derived demand and the demand for labour is derieved in the demand for the product it produces.
Demand for labour refers to the amount of labour of a given type employed by the firm at a given wage rate. Demand for labour therefore various factors.
Factors affecting demand for labour
1]. Demand for the product – Demand for a particular type of labour also depends partially on the demand for products Demand for labour is a derived demand i.e. derived from the demand of the product produced by labour. Therefore demand for product increases and demand for labour increases and demand for product decreases and demand for labour decreases
An increase in wage rate [ie an increase in cost of production] may lead to an increase in the price of the product and therefore a fall in sale. Thus an increase in wage rate may reduce employment. This is because the employer may substitute that type of labour with other productive resources.
A decrease in wage rate [ie an decrease in cost of production] may lead to an decrease in the price of the product and therefore a rise in sale. Thus a decrease in wage rate may increase employment. This is because the employer may substitute other productive resources with that type of labour. In reality wages seldom fall.
2] Prices of other factors of production – Resources to some extent are substitutes of one another. Demand for a particular type of labour will depend partly on the ability of the employer to substitute some other type of labour or some other factor of production for it. eg with a rise in wages of skilled labour, an employer may substitute it by less skilled labour. Since labour is now more expensive the employer may substitute it by capital. This will reduce the demand for labour; and when wages fall or other factors become cheaper demand for labour will rise.
3] Joint demand – Joint demand refers to factors which are complementary to each other. Eg even though sewing machines have become cheaper they cannot substitute labourers required to operate them in a readymade garments factory. Therefore demand for labour is not always affected by price of complements.
4] Productivity of labour – The marginal productivity of labour determines the demand for labour. M. P. is the addition made to the total output by employing one more unit of labour.
More the productivity greater will be the demand for labour and less the productivity lesser will be the demand for labour.
A producer will stop employing labourers at a point where the marginal productivity of labour is equal to wages.
5]. Technology – Demand for labour depends on type of technology and techniques of production adopted. e.g. demand for labour will rise with labour intensive technology adopted.
6]. Prices of capital inputs – Since labour and capital can be substituted by each other demand for labour depends on price of capital input i.e. If the price of the capital is high demand for labour will be high and vice-versa.
7] Economic conditions – agricultural development and industrialization in the country will increase investment in various fields leading to increase in demand for labour.
If the country is experiencing a boom, the aggregate demand in the country will increase leading to an increase in profits of the firms. Therefore the firms will expand resulting in an increase in demand for labour and vice versa.
8]. Elasticity of demand for labour – It is the strength of the response of the firms demand for labour to a change in wage rate.
It is determined by -
a. The elasticity of demand for the product
fall in wage rate – fall in cost of production – fall in price
If demand for the product is elastic, then demand will rise more than fall in price. So, producers are induced to produce more. Therefore demand for labour will rise and vice-versa.
When demand for the product is elastic, demand for the labour is elastic and vice-versa.
b. Degree of substitution – If degree of substitution is high, e.g. a slight rise in wage rate and producer will substitute labour by capital and demand for labour will fall.
c. Impact of trade unions – Trade unions prevents substitutions of other factors of labour, and therefore demand for labour becomes inelastic.
Industries demand for labour
So far individual’s firm’s demand for labour has been discussed. Therefore the market demand for the labour is the industries demand for labour i.e. horizontal summation of demand for labour of all firms.
d) Labour costs as a percentage of total costs – When labour expenses are a high proportion of total costs demand for labour tends to be elastic eg as observed in call centers where labour expenses are a high proportion of the total costs of the business.
Industries/market demand for labour
So far individual firms demand for labour has been discussed. The industry is a collection of firms. The industry’s demand as a whole represents the market demand for labour Therefore the market demand for the labour is the industries demand for labour i.e. horizontal summation of demand for labour of all firms.
In case of individual firms as well as the industry demand for labour is inversely related to wage rate.
The elasticity of demand for labour depends on the time period. In the short run it will be inelastic and in the long run it will be more elastic as the substitutability between labour and capital is greater.