What Causes Shifts in the Demand for Labor?

The demand curve for labor shows the quantity of labor employers wish to hire at any given salary or wage rate, under the ceteris paribus assumption. 

A change in the wage or salary will result in a change in the quantity demanded of labor. If the wage rate increases, employers will want to hire fewer employees. The quantity of labor demanded will decrease, and there will be a movement upward along the demand curve. If the wages and salaries decrease, employers are more likely to hire a greater number of workers. The quantity of labor demanded will increase, resulting in a downward movement along the demand curve.

Shifts in the demand curve for labor occur for many reasons. One key reason is that the demand for labor is based on the demand for the good or service that is produced. Therefore the demand for labor is called a “derived demand.” 

As the demand for the goods and services increases, the demand for labor will increase, or shift to the right, to meet employers’ production requirements. As the demand for the goods and services decreases, the demand for labor will decrease, or shift to the left. 

In addition to the derived demand for labor, demand can also increase or decrease (shift) in response to several factors.

Demand for Output - When the demand for the good produced (output) increases, both the output price and profitability increase. As a result, producers demand more labor to ramp up production.

Education and Training - A well-trained and educated workforce causes an increase in the demand for that labor by employers. Increased levels of productivity within the workforce will cause the demand for labor to shift to the right. If the workforce is not well-trained or educated, employers will not hire from within that labor pool, since they will need to spend a significant amount of time and money training that workforce. Demand for such will shift to the left.

Technology - Technology changes can act as either substitutes for or complements to labor. When technology acts as a substitute, it replaces the need for the number of workers an employer needs to hire. For example, word processing decreased the number of typists needed in the workplace. This shifted the demand curve for typists left. An increase in the availability of certain technologies may increase the demand for labor. Technology that acts as a complement to labor will increase the demand for certain types of labor, resulting in a rightward shift of the demand curve. For example, the increased use of word processing and other software has increased the demand for information technology professionals who can resolve software and hardware issues related to a firm’s network. More and better technology will increase demand for skilled workers who know how to use technology to enhance workplace productivity. Those workers who do not adapt to changes in technology will experience a decrease in demand.

Number of Companies - An increase in the number of companies producing a given product will increase the demand for labor resulting in a shift to the right. A decrease in the number of companies producing a given product will decrease the demand for labor resulting in a shift to the left.

Government Regulations - Complying with government regulations can increase or decrease the demand for labor at any given wage. In the healthcare industry, government rules may require that nurses be hired to carry out certain medical procedures. This will increase the demand for nurses. Less-trained healthcare workers would be prohibited from carrying out these procedures, and the demand for these workers will shift to the left.

Price and Availability of Other Inputs - Labor is not the only input into the production process. For example, a salesperson at a call center needs a telephone and a computer terminal to enter data and record sales. If prices of other inputs fall, production will become more profitable and suppliers will demand more labor to increase production. This will cause a rightward shift in the demand curve for labor. The opposite is also true. Higher prices for other inputs lower demand for labor.

Related Topics

• Labor Economics
• Labor Market Equilibrium
  
• Labor Market
• Labor Market Equilibrium
• Labor Market Efficiency
• Price, Supply, and Demand in the Labor Market
• Equilibrium Wage
• Shifts in the Demand for Labor
• What Causes Shifts in the Supply Labor?
• How Technology affects Demand for Labor?
• Minimum Wage as a Price Floor in the Labor Market
• What is the First Rule of Labor Markets?
• Labor Demand in Perfectly Competitive Markets
• Imperfect Competition in Labor Markets
• Monopsony
• Oligopsony
• Labor Market Power of Employers
• What is the marginal Cost of Labor?
• Labor Market Power of Employees
• What is a Bilateral Monopoly in a Labor Market?
• Wage Elasticity of Labor Supply
• Equilibrium in Supply and Demand in Labor Markets
• Shifts in Supply and Demand in Labor Markets