An increase in the demand for labour causes the demand curve to shift from D1 to D2, causing an increase in the quantity of workers from Q1 to Q2. On the other hand a decrease in the demand for labour will cause the demand curve to shift from D1 to D3, resulting in a decrease in the quantity of workers from Q1 to Q3. Some of the non-wage factors that influence the demand for labour are listed below:
Factors that influence the demand for labour
The price of the good/service the worker is making
An increase in the price of the good/service the worker is making will cause an increase in total revenue (TR=PxQ) (ceteris paribus) and therefore the marginal revenue product of the worker will also increase. As productivity is linked to the demand for labour, an increase in mrp will cause demand for labour to increase.
The demand for the final good/service they produce
The demand for labour is provided by households and is dependent on the demand for the goods/service that they produce. Therefore, in times of economic boom there is an increase in the demand for labour derived from the increase in aggregate demand. This is due to the fact that in order to meet the increase in demand for goods/services, firms must increase their output. However, if they’re already operating at full capacity they will have to increase their factors of production, the main one being labour.
In addition to this, the demand for labour is also influenced by the worker’s marginal revenue product. This is a measurement of the worker’s output. Therefore, if there is an increase in worker productivity, then demand for labour will increase. This is because an increase in mrp can make it more efficient for firms to use workers to produce their good/service than it is to use capital.
The price of capital
Given the fact that labour and capital can be substitutable in some industries, it can be concluded that when the price of capital increases, so does demand for labour. This is because the increase in the cost of capital increases the number of firms in which it is more cost effective to use labour than capital.