Demand for Labour

This section explains Demand for Labour including, Factors That Influence the Demand for Labour and Demand for Labour as a Derived Demand.

The demand for labour refers to how many workers firms are willing and able to hire at a given wage rate. Unlike product demand, labour demand is derived from the demand for the goods and services that labour helps produce.

Factors That Influence the Demand for Labour

Several factors affect how much labour a firm demands:

• Wage rate: As the wage increases, the cost of hiring labour rises, causing a contraction in demand (movement along the curve).
• Labour productivity: If workers become more productive (e.g. due to training or technology), demand for labour increases.
• Price of the final product: Higher product prices increase the value of labour's output, raising demand.
• Cost of capital (substitute factors): If capital (e.g. machinery) becomes cheaper relative to labour, firms may substitute away from labour.
• Technology: Can either complement or substitute labour. For example, automation may reduce demand for low-skilled jobs but increase it for high-skilled roles.
• Regulation and employment laws: Minimum wages, health and safety requirements, or employment protection may affect hiring decisions.
• Employer expectations: Anticipated changes in demand for goods/services may cause firms to adjust labour demand accordingly.

Demand for Labour as a Derived Demand

Labour is a derived demand because it is not demanded for its own sake, but for what it can produce.

• For example, if demand for cars rises, car manufacturers will hire more workers — the demand for car production leads to a derived demand for car workers.
• If demand for a product falls, so will the derived demand for the labour used to produce it.
• The marginal revenue product of labour (MRPL), the additional revenue generated by employing one more worker and plays a key role. It is calculated as:

MRPL = Marginal Product of Labour × Marginal Revenue

Firms will hire workers up to the point where MRPL = Wage Rate, ensuring profit-maximising use of labour.

Summary

Labour demand is influenced by economic, technological, and regulatory factors, but is always dependent on the demand for output. Understanding its derived nature is key to analysing how employment responds to changes in product markets.