Definition of “Demand for Labour”

The demand for labour is a form of derived demand, this means that the factor of labour is not directly demanded for but rather its demand is associated with the demand for what the final product is.

Definition of “Supply of Labour”

This refers to the total number of hours that the labour force is willing and able to supply at a given wage rate during a specific period of time.

MARKET EQUILIBRIUM IN THE LABOUR MARKET

In a perfectly competitive market, the equilibrium wage rate is at (W_0) while employing (L_0) units of labour.

Equilibrium occurs when the Supply of Labour equals the Demand for Labour, (S_L = D_L)

At a wage rate of (W_1), supply is greater than demand, i.e. (S_L > D_L). This represents a surplus of labour in the market. This surplus causes wage rates to decrease to (W_0) where equilibrium is established.

Alternatively, when the wage rate is at (W_2), demand for labour exceeds supply of labour resulting in a shortage of labour, i.e. (D_L > S_L). This shortage causes wages to increase back to equilibrium.

Shifts in the Supply of Labour Curve

Increase in Supply of Labour

What causes the Supply of Labour to increase:

• Increase in the size of the population due to an increased birth rate or decreased death rate.
• When immigration exceeds emigration.

As shown above, the equilibrium wage rate is at (W_0), while the labour employed at that wage rate stands at (L_0). When there is an increase in supply of labour, the curve shifts to the right from (S_L0) to (S_L1), where wage rates will decrease to (W_1) - assuming ceteris paribus.

Decrease in Supply of Labour

What causes the Supply of Labour to decrease:

• Decrease in the size of the population due to an increased birth rate or decreased death rate.
• When emigration exceeds immigration.

As shown above, the equilibrium wage rate is at (W_0), while the labour employed at that wage rate stands at (L_0). When there is a decrease in supply of labour, the curve shifts to the left from (S_L0) to (S_L2), where wage rates will increase to (W_2) - assuming ceteris paribus.

Shifts in the Demand for Labour Curve

Increase in Demand for Labour

What causes the Demand for Labour to increase:

• Improvements in Technology
• Increased productivity of labour
• Increase in the cost  of substitute Factors of Production, example capital
• Increase in the price of final goods (Derived Demand)

As shown above, the equilibrium wage rate is at (W_0), while the labour employed at that wage rate stands at (L_0). When there is an increase in demand for labour, the curve shifts to the right from (D_L0) to (D_L1), where wage rates will increase to (W_1) - assuming ceteris paribus.

Decrease in Demand for Labour

What a decrease in the Demand for Labour :

• Obsolete Technology
• Decrease productivity of labour
• Decrease in the cost of substitute Factors of Production, example capital
• Decrease in the price of final goods (Derived Demand)

As shown above, the equilibrium wage rate is at (W_0), while the labour employed at that wage rate stands at (L_0). When there is a decrease in demand for labour, the curve shifts to the left from (D_L0) to (D_L2), where wage rates will decrease to (W_2) - assuming ceteris paribus.

Role of the Government imposing a Minimum Wage on the Labour Market

A minimum wage is a price floor set by the government above the equilibrium wage rate. This is implemented to ensure employees are not exploited by employers.

Effects of a Minimum Wage Rate in the Labour Market

As shown above, the equilibrium wage rate is (W_0) and (L_0) labour is employed.

When the minimum wage is implemented by the government at a wage rate of (W_M):

• The demand for labour will decrease from (L_0) to (L_2).
• The supply of labour will increase from (L_0) to (L_1).

When this minimum wage is implemented, supply of labour exceed the demand for labour, i.e. (S_L > D_L). This results in surplus labour since firms will choose to hire less workers (wage rates are higher).

Role of Trade Unions in the Determination of Wage Rates

Trade Unions are organisations that bargain and negotiate on behalf of the workers for higher wage rates and better working conditions. Similarly they represent workers when they are treated unfairly in the workplace.

Effect of a Trade Union on the labour market

As shown above, the equilibrium wage rate is (W_0) and (L_0) labour is employed.

When the trade union negotiates for a higher wage rate of (W_U):

• The demand for labour will decrease from (L_0) to (L_2).
• The supply of labour will increase from (L_0) to (L_1).

When this higher wage rate is implemented, supply of labour exceed the demand for labour, i.e. (S_L > D_L). This results in surplus labour since firms will choose to hire less workers (wage rates are higher).