Factors Influencing the Demand for Labour (Edexcel IGCSE Economics)

The Demand for Labour is a Derived Demand

Spec point — 1.2.5a

• 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

Spec point — 1.2.5e

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

As wages rise, the quantity demanded of labour falls

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

Spec point — 1.2.5a

• 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 Factors that Influence the Demand for Labour

  • 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

An Increase in Demand for Labour

Spec point — 1.2.5e

Example: An Increase in Demand for Labour

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

Increase in demand for labour due to the increased demand generated by online shopping

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

A Decrease in Demand for Labour

Spec point — 1.2.5e

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

Decrease in demand for labour as machinery replaces labour

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