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Understanding Derived Demand for Labor

Labour demand is derived from the need to produce goods and services that generate revenue and profits. Employers will hire additional workers when their Marginal Revenue Product exceeds the marginal cost of hiring them. Wages differ between occupations due to factors like education requirements, supply elasticity, demand elasticity, and risk of injury or death. According to marginal revenue product theory, wages are determined by worker productivity and the demand for their output. Workers with higher productivity or in occupations producing profitable goods tend to receive higher wages.

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Smita Rambajun
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535 views1 page

Understanding Derived Demand for Labor

Labour demand is derived from the need to produce goods and services that generate revenue and profits. Employers will hire additional workers when their Marginal Revenue Product exceeds the marginal cost of hiring them. Wages differ between occupations due to factors like education requirements, supply elasticity, demand elasticity, and risk of injury or death. According to marginal revenue product theory, wages are determined by worker productivity and the demand for their output. Workers with higher productivity or in occupations producing profitable goods tend to receive higher wages.

Uploaded by

Smita Rambajun
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

• Labour demand is a derived demand; that is, hiring labour is not desired for

its own sake but rather because it aids in producing output, which contributes
to an employer's revenue and hence profits. The demand for an additional
amount of labour depends on the Marginal Revenue Product (MRP) and the
marginal cost (MC) of the worker. The MRP is calculated by multiplying the
price of the end product or service by the Marginal Physical Product of the
worker. If the MRP is greater than a firm's Marginal Cost, then the firm will
employ the worker since doing so will increase profit. The firm only employs
however up to the point where MRP=MC, and not beyond, in economic
theory.
• Wage differences exist, particularly in mixed and fully/partly flexible labour
markets. For example, the wages of a doctor and a port cleaner, both
employed by the NHS, differ greatly. But why? There are many factors
concerning this issue. This includes the MRP (see above) of the worker. A
doctor's MRP is far greater than that of the port cleaner. In addition, the
barriers to becoming a doctor are far greater than that of becoming a port
cleaner. For example to become a doctor takes a lot of education and training
which is costly, and only those who are socially and intellectually advantaged
can succeed in such a demanding profession. The port cleaner however
requires minimal training. The supply of doctors therefore would be much
more inelastic than the supply of port cleaners. The demand would also be
inelastic as there is a high demand for doctors, so the NHS will pay higher
wage rates to attract the profession.
• Marginal Revenue Product Theory: This states that demand for labour
depends upon 2 things; Productivity of labour, and the demand for the Good
they produce (which determines price)

MRP = MPP * MR

MPP = marginal physical product (output produced by an extra worker)

MR = Marginal Revenue (this is the revenue from selling an extra unit of output -
determined by price of a good)

Therefore, MRP is important in the determining wages. Workers with higher


productivity will tend to get higher wages. Also, workers who help produce
profitable goods will get higher salaries. For example, lawyers and professional
footballers get high salaries because the Marginal revenue of their goods are high.

• Occupations which manifestly involve a great amount of personal danger


command higher wages than those regarded as perfectly safe. The risk of life
must be taken into account.

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