In this video we will analyze five factors that would cause the demand curve for labour
to shift.
Previously we learned about movements along the curve, next we will take a look at reasons
why it would shift right or left.
There are a few factors that would cause the demand for labour to increase or decrease.
Let’s see what they are.
First we will consider the demand for the good or service that labour is producing.
If the demand for the good or service increases, then the derived demand for labour will increase
and the labour demand curve will shift right.
Conversely, if the demand for the good or services decreases, then the derived demand
for labour will decrease and the labour demand curve will shift left.
At the end of this video I will show you how to draw this shift.
Second we’ll discuss government regulation and subsidies.
Actions by the government can impact the cost of employment.
If subsidies are provided for employment, then the cost of hiring workers will fall
and thus result in an increase in the demand for labour.
Conversely, if regulation is passed that makes it more expensive to hire workers, labour
demand will decrease.
Third is the productivity of labour.
As the productivity of labour increases, more output is produced per worker.
This reduces the cost of production and makes the firm more profitable.
They are then increasingly likely to employ more workers, resulting in a rightward shift
of the labour demand curve.
Fourth is the cost of capital with respect to the cost of labour.
The cost of capital can impact how firms employ labour.
If capital is a substitute in production for labour, then a rise in the cost of capital
will result in greater demand for labour (as it is the cheaper of the two options).
Conversely, if capital becomes cheaper with respect to labour, then the demand for labour
should fall.
Fifth is the impact of a change in price of the final good or service.
If the price of the final good rises, ceteris paribus, firms will employ more labour.
If the price of the final good falls, ceteris paribus, firms will employ less labour.
This is tied to the marginal revenue product of the firm and will be discussed in greater
detail in a following video.
Now we’ll look at how to draw these changes.
Given a labour demand curve DL, we will show what happens when there is an increase in
the demand for labour.
As you’ve learned with your demand curve before, this will shift the demand curve to
the right.
As the demand for labour increases, the demand curve shifts rightward to DL2.
At wage rate W1, there is now an increase in the quantity demanded of labour of Q2,
but this is along the new demand curve.
Using our explanations from before, this could be for a variety of reasons.
Suppose this is the demand for labour for workers on a coffee farm.
If global demand for coffee rises, more workers will be needed in that industry.
Next let’s take a look at what would happen in the same market if the global demand for
coffee fell.
The converse is true as well.
If global coffee demand falls as consumers switch to drinking more tea, then the demand
for labour in the coffee industry will decrease and shift leftwards.
At the given wage rate W1, the new quantity demanded for labour is Q2 which is along the
new demand curve for labour, DL2.
Again, I’d remind you to pay particular attention to how these changes are drawn.
It is important to be consistent in drawing your diagrams as this will help you avoid
mistakes in the future.
Here’s a chance to test yourself.
After the five statements have been revealed, pause the video and attempt to answer whether
this would result in an increase or decrease.
I’ll review the answers next.
Let’s see how you did.
The instances where labour demand would increase are in green.
The situations in which labour demand would decrease are in red.
For number one, the publication of this research would likely result in a fall in demand for
pizza thus reducing the demand for the labour producing it.
Number two, higher costs of employment would result in firms being less likely to hire
workers as they become relatively more expensive.
Number three, this new technique improves labour productivity and cuts costs for firms
and makes the more profitable.
This would result in higher employment.
Number four, the robots would replace workers thus resulting in a decrease in the demand
for labour.
Lastly, a successful advertising campaign would likely increase the demand for cheese
and products containing cheese such as pizza.
This would result in an increase in the demand for labour in pizza production.
If you’ve learned what you needed to in this video, you’ll have gotten all these
questions correct.
If you made a mistake, leave a comment below and let’s try and figure it out.
You should now be able to analyse 5 factors that could cause the demand curve for labour
to shift.
Additionally, you should be able to draw such changes and be able to demonstrate the impact
on a diagram.
If you have any questions or comments, leave them below and let’s try to solve them together.
That’s us done for now and I will see you in the next one.