Economics Demand of Labour

Topics: Supply and demand, Wage, Employment Pages: 26 (7317 words) Published: March 15, 2013

Definition of 'Demand For Labor'
A concept that describes the amount of demand for labor that an economy or firm is willing to employ at a given point in time. This demand may not necessarily be in long-run equilibrium, and is determined by the real wage, firms are willing to pay for this labor, and the amount of labor workers are willing to supply at that wage.

Investopedia explains 'Demand For Labor'
Demand for labor increases market wages and more workers enter the market. But this higher cost of labor will mean that employers will use less labor because it’s more expensive. 

Assuming there are a large number of employers in a region, or that workers are highly mobile geographically, the wages that a company will pay workers is dependent on the competitive market wage for a given skill set. This means that any company is a wage taker, which is simply another way of saying companies must pay competitive wages in order to obtain workers.

The demand and supply of labor are determined in the labor market. The participants in the labor market are workers and firms. Workers supply labor to firms in exchange for wages. Firms demand labor from workers in exchange for wages. The firm's demand for labor. The firm's demand for labor is a derived demand; it is derived from the demand for the firm's output. If demand for the firm's output increases, the firm will demand more labor and will hire more workers. If demand for the firm's output falls, the firm will demand less labor and will reduce its work force.

The term 'wage' has been defined as a sum of money paid under contract by an employer to a worker for services rendered.  A wage payment is essentially a price paid for a particular commodity, viz., labour services.  According to the classical wage theory, labour supply was considered a function of real wages.  But according to Keynes, the workers acted irrationally and generally bargained for money wages and they sharply reacted against any cut in money wages.  The money wage has also been called nominal wage. But money wages alone may not give us a correct idea of what a worker really earns, it is the real wage that determines the standard of living of a worker  

Factors determining Real Wages:
Following are the factors that determine the real wages or the standard of living of a worker:  
(a) Purchasing Power of Money: The purchasing power of money is used to compare wages at different places and at different times.  It varies inversely with the price level, i.e., higher the prices, lower the purchasing power, and vice versa.  A part of high wages in England and North America may be due to higher prices prevailing in those countries/regions.  

(b) Subsidiary Earnings: Subsidiary earning is the income in addition to the regular money wage, an employee has in the form of money or goods.  For example, free board and lodging are provided to the domestic servants or peons; professors earning additional income by marking examination papers, etc.  

(c) Extra Work without Extra Payment: If an employee is required to do extra work without any compensation, his real wage is reduced by that extent.  
(d) Regularity or Irregularity of Employment: Regular or more secure employment may be given money wages, but their real earning may be higher than irregular and unsecured employees receiving higher money wages.  

(e) Conditions of Work: Some occupations are healthier than others, and in some the hours of work are shorter than in others.  All these things are taken into account in evaluating real wages.  
(f) Future Prospects: A low money income will be considered a high real wage if there are good prospects of a rise in the future.  
Theories of Wages:
(a) Subsistence Theory: This theory was originated with the Physiocratic...
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