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The demand for labour
Edexcel IAL Economics · WEC13 Business behaviour
Firms do not want workers for their own sake; they want the output workers produce. So the demand for labour is a derived demand, and it depends on productivity and the price of the product.
Derived demand and MRP
The demand for labour is derived from the demand for the goods and services labour produces. If demand for cars rises, demand for car workers rises.
A firm's demand for labour is shown by the marginal revenue product curve: MRP = MP x MR (in a competitive product market, MR = P). A profit-maximising firm hires workers up to the point where MRP = wage (in a competitive labour market). MRP slopes down because of diminishing returns.
Factors that shift labour demand
- Demand for the product and its price: higher product price raises MRP.
- Productivity of labour: training, better technology working with labour raise MP and MRP.
- Price of capital relative to wages: if machines become cheaper, firms may substitute capital for labour (or, if capital and labour are complements, demand more labour).
- Non-wage costs of employment (for example, employers' social security taxes) and government regulation.
A change in the wage itself is a movement along the demand curve.
Elasticity of demand for labour
How much employment responds to a wage change. Demand for labour is more wage elastic when:
- the product's demand is price elastic (a wage rise raises price and sales fall a lot)
- labour is easy to substitute with capital or other labour
- labour costs are a large share of total costs
- in the long run (time to change methods).
PED for labour = % change in quantity of labour demanded / % change in wage.
Worked example
A worker's marginal product is 8 units per hour and each unit sells for $5 in a competitive market. The wage is $35 an hour. Should the firm hire this worker?
- MRP = MP x P = 8 x 5 = $40 per hour.
- MRP ($40) > wage ($35), so the worker adds $5 to profit each hour.
Answer: Yes: MRP exceeds the wage.
Check yourself
- A worker produces 12 extra units a day, sold at $9 each in a competitive market. Find the worker's MRP per day.
Show answer
$108. MRP = MP x P = 12 x 9 = $108.
- The wage rises by 5% and employment falls by 8%. Find the wage elasticity of demand for labour.
Show answer
-1.6. -8 / 5 = -1.6: elastic.
- Why is the demand for labour called a derived demand?
- It is set by the government
- It depends on the demand for the products that labour makes
- It depends only on the wage
- Workers decide how many jobs exist
Show answer
It depends on the demand for the products that labour makes. Firms want labour for the output it produces.
- Which would shift the demand curve for bakers to the right?
- A rise in bakers' wages
- A fall in demand for bread
- A rise in the price of bread
- Cheaper bread-making machines that replace bakers
Show answer
A rise in the price of bread. A higher product price raises MRP at every level of employment.
- Demand for a type of labour is likely to be most wage elastic when
- it is easy to replace workers with machines
- labour is a tiny share of total costs
- demand for the product is price inelastic
- the time period is very short
Show answer
it is easy to replace workers with machines. Easy substitution means employment falls sharply after a wage rise.
- A profit-maximising firm in a competitive labour market hires workers until
- MRP is zero
- the wage is zero
- MRP equals the wage
- average product is at a maximum
Show answer
MRP equals the wage. Beyond that point an extra worker costs more than they add to revenue.
Sources
Last updated 8 November 2026. Spotted a mistake? Tell us.