Factors affecting demand for labour

The fact that a firm’s demand curve for labour is given by the downward-sloping portion of its marginal revenue product of labour curve provides a guide to the factors that will shift the curve. In perfect competition, marginal revenue product equals the marginal product of labour times the price of the good that the labour is involved in producing; anything that changes either of those two variables will shift the curve.  The demand for labour will be influenced by

Changes in the Use of Other Factors of Production

As a firm changes the quantities of different factors of production it uses, the marginal product of labour may change. Having more reference manuals, for example, is likely to make additional accountants more productive—it will increase their marginal product. That increase in their marginal product would increase the demand for accountants. When an increase in the use of one factor of production increases the demand for another, the two factors are complementary factors of productioncomplementary factors of productionFactors of production for which an increase in the use of one increases the demand for the other.

Other inputs may be regarded as substitutes for each other. A robot, for example, may substitute for some kinds of assembly-line labour. Two factors are substitute factors of productionsubstitute factors of productionFactors of production for which an increase in the use of one decreases the demand for the other if the increased use of one lowers the demand for the other.

Changes in Technology

Technological changes can increase the demand for some workers and reduce the demand for others. The production of a more powerful computer chip, for example, may increase the demand for software engineers. It may also allow other production processes to be computerized and thus reduce the demand for workers who had been employed in those processes.

Changes in Product Demand

A change in demand for a final product changes its price, at least in the short run. An increase in the demand for a product increases its price and increases the demand for factors that produce the product. A reduction in demand for a product reduces its price and reduces the demand for the factors used in producing it. Because the demand for factors that produce a product depends on the demand for the product itself, factor demand is said to be derived demandderived demandDemand for a product that is derived from demand for factors used in its production. That is, factor demand is derived from the demand for the product that uses the factor in its production.

Changes in the Number of Firms

We can determine the demand curve for any factor by adding the demand for that factor by each of the firms using it. If more firms employ the factor, the demand curve shifts to the right. A reduction in the number of firms shifts the demand curve to the left. For example, if the number of restaurants in an area increases, the demand for waiters and waitresses in the area goes up. We expect to see local wages for these workers rise as a result.