Factors Influencing the Demand for Labour (Edexcel IGCSE Economics)

The Demand for Labour is a Derived Demand

• The labour market is composed of sellers of labour (households) and buyers of labour (firms)

  • Workers supply their labour, and firms demand labour to produce an output

• The demand for labour is a derived demand

  • This means the level of labour demand depends on the demand for goods and services

    • If demand for goods and services increases, then demand for labour will increase, and vice versa

    • E.g. As the demand for technology devices increases, technology firms require more skilled labour to design, manufacture and market the tech products

The Demand Curve for Labour

• There is an inverse relationship between wage rate and the quantity  of labour demanded

Diagram analysis

• The demand curve for Labour (D_L) shows that firms demand more labour as the wage rate decreases, which results in a downward sloping demand curve 

  • If the wage rate increases (W1 to W2), then the demand for labour falls (Q1 to Q2)

Factors That Influence the Demand for Labour

• If the wage rate is the only factor that changes, there will be a movement along the demand curve for labour

• However, a range of factors can shift the entire demand curve for labour to the left or right

  • When the demand curve for labour shifts to the left, it indicates that fewer workers are employed at each wage rate 

  • When the demand curve for labour shifts to the right, it indicates that more workers are employed at each wage rate 
     

  Factors that Influence the Demand for Labour

Example: An Increase in Demand for Labour

• An increase in online shopping has led to an increase in demand for labour to deliver goods

Diagram analysis

• Due to the increases in e-commerce, online companies have experienced high demand for goods

• This had led to a demand for labour to deliver these goods

  • There is a shift in demand for labour from D_L → D₁

  • The wage remains unchanged at W1, but the demand has increased from Q to Q₁ workers

Example: A Decrease in Demand for Labour

• Clothing manufacturers in countries like Bangladesh and Vietnam have been investing in automated production to reduce the demand for labour in order to save on labour costs

Diagram analysis

• Due to the ability to substitute capital for labour, there has been a fall in demand for labour to make clothes

  • There is a shift in demand for labour from D → D₂

  • The wage remains unchanged at W1, but the demand has decreased from Q to Q2 workers