What factors influence the demand for labour and how is the demand for labour derived demand?

Demand for labour is the willingness and ability of firms to employ workers at different wage rates in a given time period.

As shown in the diagram, when the wage rate falls from W to W1, the quantity of labour demanded extends from Q to Q1. This is because labour becomes relatively cheaper than capital as labour and capital are substitutable. 

Labour demand is determined by MRP (Marginal Revenue Product). MRP is the value the producer places on employing an additional worker (or more generally on an additional factor of production). Moreover, the demand for labour is a derived demand. This is because the demand for labour stems from the demand for the goods and services that the firm produces. More demand for the goods and services that the firm produces means that, for producers to meet this demand, they will increase their demand for labour which is likely to produce these goods and services.

1. Labour productivity. If labour becomes more productive than capital, employers will increase their demand for labour as labour is a substitute for capital.
2. Demand for final output. If the product that labour produces is in high demand, then the derived demand for labour will also be high.
3. Relative cost of capital inputs. If capital inputs become relatively more expensive than labour, then firms will substitute labour for capital and hence the demand for labour falls.
4. Productivity of labour-saving technology. If labour-saving technology becomes more productive than labour, then firms will substitute labour with labour-saving technology, hence demand for labour falls. 
5. State of the economy. When the economy is in a poor state (e.g. a recession), demand for all products will be low, meaning that derived demand for labour will likely also be low.
6. Employment taxes. Employment taxes are taxes on employing labour. If these rise, then demand for labour falls as labour is now more expensive to employ.

Changes in these factors will shift the demand curve for labour outwards or inwards as demonstrated below.

What factors influence the supply of labour (with reference to a particular occupation)?

The supply of labour is the quantity of labour that workers are willing and able to offer for employment at a given wage rate in a given time period.

The labour supply curve is shown above. It is upward-sloping. An increase in the wage rate from W to W1 will lead to an extension in the quantity supplied of labour from Q to Q1.

Factors affecting the supply of labour include: 

1. Extra monetary pay. Extra pay such as bonuses or overtime payments will increase the supply of labour.
2. Barriers to entry. These are usually job requirements, such as a worker must have a degree to become a teacher.
3. Non–monetary benefits. These benefits could include flexible work schedules and employee perks such as free meals. These enhance job satisfaction and will increase the supply of labour.
4. Population demographics. Population growth and age distribution can influence the supply of labour available.

These factors can be applied to a specific occupation. For example, there are very high barriers to entry when attempting to become a doctor. This is because workers must train for many years and must achieve many qualifications before being able to become a doctor, this may reduce the supply of labour. However, sometimes doctors may be given large extra monetary payments, for example, if they work overtime, which may help to boost the supply of doctors.

Changes in these factors will shift the supply curve for labour outwards or inwards as demonstrated below:

What are the types of market failure in the labour market?

1. Geographical immobility of labour. Labour may be immobile because they are unable to move to an area where they can be employed. This could be due to housing affordability issues, family ties, the cost of commuting or language barriers.
2. Occupational immobility of labour. This is where workers struggle to move between industries due to barriers to entry, meaning that workers may stay unemployed or may be employed inefficiently.
3. Skills gaps. Because of the free-rider problem, markets often don't provide enough training for workers to gain sufficient skills. This is because some workers may leave the firm as soon as their training is complete, hence the worker doesn't 'pay back' the firm over time for the investment the firm made in their training. This may lead to a deficit in human capital, with reduced MRP. It can also restrain growth in productivity levels.
4. Working poverty. Some workers, even though they are employed, are paid very low wages, meaning that workers may fall into relative or absolute poverty.
5. Discrimination. Some employers may make decisions on prejudices such as gender, race, religion and age. This is illegal. This can lead to variations in wage rates for the same job. The diagram below illustrates the effects of discrimination within the labour market.

Where is the labour market equilibrium using diagrammatic analysis?

In a perfectly competitive labour market, there are many firms, with perfect information about wages and job conditions. Firms are offering homogenous jobs and there are many workers with the same skills.

The profit maximising output is where MC=AC at a labour cost of WR and quantity of labour Q. Firms are wage takes as workers wouldn't accept lower wages as they have perfect information about market wage rates. The equilibrium wage rate is set by the intersection of the supply and demand curves. As firms are wage takers, the supply curve of labour is perfectly elastic, so AC=MC. 

It is unlikely that all labour markets are perfectly competitive as workers and firms usually have the power to influence wages. In an imperfectly competitive labour market, trade unions try and increase wages, employment and working conditions, whilst firms (typically monopsonies) try to keep wages low.

What are examples of labour market issues?

1. Inflation eroding real incomes. When inflation is high, real incomes are likely to be falling. Workers then attempt to bargain for higher wages so that they can maintain their living standards. This may lead to a wage-price spiral where inflation is only pushed higher whilst wages are eroded.
2. Wage differentials. Some workers may be paid unfairly due to discrimination taking place within the labour market. Wage differentials may also occur due to geographical and occupational immobility. 
3. Zero-hour contracts. Workers on zero-hour contracts may be uncertain about their income as they often receive minimal notice about their work schedules. 

What are examples of government intervention in the labour market?

1. Minimum wages. A minimum wage corrects the market failure that would occur in a free market where some workers may be paid a wage lower than what is required to maintain a basic living standard. This helps to reduce poverty, boost consumption (as some workers have higher wages than they would before this intervention), reduce inequality and improve the productivity of some workers. The introduction of a National Minimum Wage is demonstrated below: An NMW has been introduced to the labour market. However, there is an excess supply of labour at the wage rate of NMW as Qs>Qd. This creates unemployment, meaning that some workers will be left with no income in the form of wages. Another disadvantage of the NMW is that it is likely to increase the cost of firms at wage rates (which are likely to be one of the biggest costs of a firm) have risen from W to NMW. There may also be potential regional disparities when trying to set a uniform NMW as there are regional differences in living costs.
2. Maximum wages. Maximum wages may be introduced by a government to help reduce income inequality within an economy, such as setting a maximum wage that CEOs can earn. However, maximum wages may disincentivise talented workers from taking up higher positions if their wages are capped, and it may also lead to excess demand for those on very high wages. It may also lead to a brain drain out of the country, as very high earners move to another country where there is no cap on wages.
3. Public sector wage setting. Public sector wages can establish benchmarks for private sector wages, which hence has an impact on wages throughout the economy. Public sector wages can also encourage or discourage workers from entering the private sector.
4. Policies aiming to tackle labour market immobility (both geographical and occupational). Training programmes and support for moving houses can improve the flexibility of workers and improve the process of matching workers to the jobs that are available. However, these policies are likely to be costly to implement.
5. Reducing the power of trade unions. The government can reduce the power of trade unions to encourage labour market flexibility and limit disruption to the economy. However, this leaves workers with less legal representation and can lead to workers being easily exploited, especially if their employer is a monopsonist in the labour market. 
6. Health and safety standards. These safety standards and regulations may help to improve the working environment that a worker operates in. However, the costs of compliance with these standards on businesses may affect their competitiveness.

What is the significance of the elasticity of demand for labour and the elasticity of supply for labour?

PED of labour measures the responsiveness of the quantity of labour demanded in response to a change in the wage rate. Factors affecting PED may include:

1. PED of final output. If demand for the good or service being sold in the product market is inelastic, then the producer will easily be able to pass on higher costs to the consumer, so demand for labour will be inelastic.
2. Labour costs as a percentage of total costs. When labour costs make up a higher percentage of total costs, then demand for labour will be more elastic as the firm will be more sensitive to wage rate changes.
3. Ease of factor substitution. If labour is easily and cheaply substitutable with other inputs, then demand for labour will be more elastic.

PES of labour measures the responsiveness of the quantity of labour supplied in response to a change in the wage rate. Factors affecting PES may include:

1. Skills and educational requirements. For an occupation which requires skills that take a long time to develop, or an occupation that requires lots of educational requirements to be achieved, the labour supply will be more inelastic.
2. Time period. In the short run, the labour supply curve is more inelastic as it takes time for workers to respond to changes in wage rates. 

When PES and PED are inelastic, it is likely that a shift of the labour supply curve and/or the labour demand curve will have a significant effect on the wage rate, with a smaller than proportionate effect on the quantity of labour. When PES and PED are elastic, it is likely that a shift of the labour supply curve and/or the labour demand curve will have a small effect on the wage rate, with a larger than proportionate effect on the quantity of labour.