1.2.5 - Labour demand, supply and wages

Demand for labour

Firms demand labour because workers help produce goods or services that customers want to buy.

Demand for labour is the number of workers, or worker-hours, employers are willing and able to hire at each wage rate. It is derived demand: it comes from demand for the final product. If an illustrative hotel receives more bookings, it may need more cleaners at every wage, shifting labour demand right. A fall in bookings can shift it left. More product demand does not always require proportionally more workers if spare capacity or new equipment can supply the extra output.

The availability of substitutes, including machines, can reduce labour demand when machines perform tasks previously done by workers. A cheaper automatic packing machine may reduce demand for packers. Some technology instead complements labour: new diagnostic equipment may make trained technicians more useful. Explain which workers are being replaced or supported rather than assuming all technology reduces all employment.

Workforce productivity measures output per worker or worker-hour. Higher productivity can make workers more valuable to an employer, increasing the demand for their labour at a given wage. Yet if a firm needs only a fixed output, fewer worker-hours might produce it. The result depends on whether lower costs or better products also expand sales.

The labour-demand curve generally slopes downward. With other conditions unchanged, a higher wage raises the cost of employing workers and can encourage employers to use fewer workers or substitute machinery. A wage change causes a movement along the curve; a change in product demand, technology or productivity can shift the whole curve.

Supply of labour

Labour supply depends on how many people can work and how many are willing and able to enter a particular occupation or location.

Supply of labour is the number of workers, or worker-hours, willing and able to work at each wage. A higher wage can attract more people into an occupation, giving an upward-sloping market supply curve, other things equal. That is a movement along the curve. Changes in the workforce or access to the occupation shift it.

Population size matters, but total population is not the same as the available workforce. Age distribution matters because a population with many children or retired people may have fewer potential workers relative to its size. Net inward migration of working-age people can increase labour supply; emigration can reduce it. Migrants' skills and ability to work in the occupation determine the specific market affected.

Raising retirement age can keep people available for work for longer. Raising school-leaving age can reduce the immediate supply of young workers, while potentially improving their qualifications later. Both effects depend on participation rather than every eligible person necessarily working. Greater female participation, perhaps enabled by childcare or changing opportunities, increases available workers without requiring a population increase.

Skills and qualifications affect whether people are able to take a job. A large population does not provide many qualified surgeons immediately. Education, training or recognition of qualifications can shift skilled labour supply right over time.

Geographical mobility is the ability to move to another location for work. Housing costs, family commitments or poor transport can restrict it. Occupational mobility is the ability to move into a different type of work. Transferable skills and affordable retraining can improve it; specialised qualifications can restrict it. When unemployed workers cannot reach or qualify for available jobs, plentiful labour in one market need not remove shortages in another.