Determinants of demand for labour

  • Productivity/efficiency – skill and expertise
  • Real wage rate (the proportion of TC accounted for labour cost)
  • Mobility and the marginal rate of technical substitution between labour and other factors of production particularly capital.
  • Technology – depending on the resource mix
  • Demand for goods that labour help produce (final product) – elasticity of demand for the final product.
  • Availability and efficiency of other factors of production
  • Government policy

NB: Briefly explain each of these determinants.


Elasticity of demand for the final product::
If labour is producing a commodity with a very inelastic demand, an increase in wages will have a relatively small effect on the demand for labour. If the increase in wages is passed on in the form of higher prices, the fall in quantity demanded of the product will be relatively small. There will be a corresponding small reduction in the demand for labour. However, if the demand for the product is elastic, a small increase in price will lead to a relatively larger reduction in the quantity demanded; if an increase in wages is passed on in the form of higher prices, there will be a large reduction in the demand for labour.

The proportion of total costs accounted for labour costs:
If wages account for only a small proportion of total cost, the demand for labour will be inelastic.
Some industries are labour-intensive e.g house building in the construction industry and therefore labour cost make up a large proportion of the total cost of production; other industries are capital intensive e.g oil refinery.
If wages increase while productivity remains unchanged, the labour cost accounts for a greater percentage of the average cost in a labour-intensive industry. The effect of the increase in wages will be to raise the unit cost. In contrast, in a capital-intensive industry where labour cost form a lesser percentage of the average cost, an increase in wages will raise the unit cost at a lower percentage than in the earlier case. If the increased cost are passed on in the form of higher prices, the effects for demand of labour are likely to be much greater in the case of labour intensive industry.

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