Demand for Labour
“The demand for laboor by the individual firm is a function of both the productivity of labour and the money demand for the firm’s product.·06 In other words, the demand for labour reflects partly labour’s productivity and partly the market v clue of the product at different levels of production. TIle demand for labour is a derived demand, It is derived from the demand for the commodities it helps to produce. Greater the consumer demand for the product, the greater the producer demand for the labour required in making it. It may be observed that it is expected demand and not existing demand for the product that determines demand for labour. Hence. an expected increase in the demand for a commodity will increase the demand for the type of labor that products this commodity.
Apart from the magnitude of demand (i.e., big or small). we have also to consider its elasticity or responsiveness to change in wages. The elasticity of demand for labour depends on the elasticity of demand for its output. Also, demand for labour will generally be inelastic if their wages form only a small proportion of the total wages. The demand, on the other hand, will be elastic if the demand for the commodity it produces, is elastic or if cheaper substitutes are available.
The demand for labor also depends on the prices and the quantities of the co-operating factors. Suppose, the machines are costly, as is the case in India, obviously more labor will be employed. The demand for labour will be more. Also, the greater the demand for the co-operating factors the greater will be the demand for labour. Another factor that influences the demand for labour is the technical progress. In some cases, labour and machinery are used in definite proportions. For instance, the introduction of automatic looms reduces the demand for labour. Thus, demand for labour is determined by (a) the nature of demand for the product of labour, (b) the proportion of the cost of labour to the total cost of the product, (c) its sustainability by other factors, and (d) supply of capital as determined by the ability and willingness of investors to save and invest. After considering all relevant factors, e.g., de- . mand for the products, technical conditions. the prices of the co-operating factors, etc .. the employer is governed by one fundamental factor, vi;.. marginal productivity. The demand for labour, under typical circumstances of a modem community comes from the employer. who employees labour and other factors of production for making prolits out of his business. The demand price of labour, therefore is the wage that an employer is willing to pay for that particular kind of labour.
Suppose, the employer employs laborers one by one. After a point, the law of diminishing marginal returns will come into operation. Every additional labour employed will add to the total net production at diminishing rate. The employer will naturally stop employing additional labourers at the point at which the cost of employing a labourer just equals (in fact it is little less than) the addition made by him to the value of the total net product. Thus, the wages that he will pay to such a labour (the marginal unit of labour) will be equal to the value of this additional product or marginal productivity. But since all the labour units are supposed to be homogeneous, what is paid to the marginal worker will be paid to all the labourers.
Under perfect competition, the supply of I.lll(mr, as already mentioned, is perfectly ela- IC, Sill, ” no single firm can influence the price of about III ihe market as a whole. But actually COlT’ etition 10 the world is not perfect, Under imperfect mpetition. we have an upward sloping supply curve The particular slope of the supply curve will deper-. on a number of inter-related factors such as the existence or absence of unemployment in the neighbouring lab ‘\lC market. the reaction of the other firms to a change i the wage rate made by the firm in question, differences I the efficiency of the workers, and so on. The supply of labour becomes Ir vs elastic as the margin of full employment is reached or if the particular firm accounts for a large share of II>employment.
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