Criticism of the Theory of Labour Demand The standard models of labour demand in economics refer to the neoclassical marginal productivity theory of demand. According to this model, there are several simplifying assumptions must be made, which are: Goal of business firms is to maximize profit Two goods produce There are only two factors of production (capital and labour) to produce its product. Firm operates in perfectly competitive product and labour market. Wages represent the only cost of labour and that labour is completely homogenous.
Based on this assumption, the critics summarize that it rests on a number assumptions that are unrealistic or incorrect. Firstly, I want to touch on marginal product (MP) in order to determine/measurer the addition to output of each successive worker. In reality, it really difficult and need a large of time to the manager of a firm measure or even approximate the additional output increase by hiring a new employees. The difficulties of measuring the marginal product in a large scale organization or big company (e.g Giant, Tesco and Carrefour) where have a thousand of employees with different expertise/qualification/experience and produce more than two goods in production. Furthermore, there are various line activities consult to produce one unit of output. So, may manager derive different labour demand curve/MP for each activity? .In a competitive business world, employer may not be able to identifying MP contribution of each individual workers and implement as the theory presumes. Besides that, how certain firm/industries that not produce the goods but offer the services (intangible) such as PLUS, tuition centre, law firm and so on to measure MP on each individual employee. In many cases it is hard to objectively measure productivity because no physical output is produced or the output produced may not be sold at a market price. This makes it hard to place an exact valuation on the output of each extra worker....
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