DETERMINANTS OF LABOR
DEMAND
1. Changes in Demand for the Product
(derived demand)
- If Demand for the
product increases then demand for labor used to make that
product will increase
- If Demand for the product
decreases then demand for labor used to make that product
will decrease
2. Productivity Changes
- If the productivity of
labor increases then demand for labor will
increase
- If the productivity of labor
decreases then demand for labor will decrease
Factors that affect productivity of
Labor:
- the quantity
of nonlabor inputs used: more other resources
used with labor = more productivity of
labor
- technological progress:
more technological progress = more productivity
of labor
- labor quality: better
quality = more productivity
3. Changes in the Prices of Other
Resources (Substitutes and Complements)
Substitute
Resources
Substitution
effect
- an increase in
price of a substitute resource will cause the
demand for labor to increase
- a decrease in the price of
a substitute resource will cause the demand for
labor to decrease
Output effect
- an increase in
price of a substitute resource will cause the
quantity of product produced to decrease and the
demand for labor will decrease
- a decrease in price of a
substitute resource will cause the quantity of
product produced to increase and the demand for
labor will increase
Net effect
- if the
substitution effect is greater than the output
effect then a decrease in the price of a substitute
resource will decrease the demand for
labor
- if the output effect is
greater then the substitution effect then a
decrease in the price of a substitute resource will
increase the demand for labor
Complementary
Resources
- an increase in price
of a complementary resource will cause the demand for
labor to decrease
- a decrease in the price of a
complementary resource will cause the demand for labor
to increase
DETERMINANTS OF THE ELASTICITY OF
LABOR DEMAND
1. Ease of Resource
Substitutability
- the greater the number
of substitute resources, then the demand for labor is
more elastic
- the fewer the number of
substitute resources, then the demand for labor is less
elastic
2. Elasticity of Product
Demand
- the more elastic the
demand for the product, then the demand for labor used to
produce that product is more elastic
- the less elastic the demand for
the product, then the demand for labor used to produce
that product is less elastic
3. Labor-Cost to Total-Cost
Ratio
- if labor is a greater
proportion of the total costs of production, then the
demand for labor is more elastic
- if labor is a smaller proportion
of the total costs of production, then the demand for
labor is less elastic
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