Demand and Supply of Labor

Demand of Labor

It refers to number of laborers/employees which a firm is willing and able to hire at given wage rate over a specified period of time. It’s a derived demand since it arises from the demand of goods and services

Determinants of demand for labor

  • Demand for goods and services the firm is producing. As demand for goods increase, demand for labor increases.
  • Productivity of labor. If labor is more productive compared to other factors, the demand for labor increases.
  • Changes in the prices of other factors of production. Comparing price of labor and capital, if price of capital increases relative to that of labor, then the demand for labor increases.
  • The wage rate: The higher the wage rate the lower the demand

Supply of Labor

This refers to the number of workers willing and able to work (or man-hours available for work) at a given wage rate and over given period of time.

Labour is no doubt the most important of all factor or production, for the efficiency of any production will to a large extent depend on the efficiency and supply of the labour working in the process. Besides labour is also the end for which all production is undertaken.

Determinants of Supply of Labor

The supply of labour will be determined by:

  • Population Size: In any given economy, the population size determines the upper limit of labour supply. Clearly there cannot be more labour than there is population.
  • Age Structure – The population is divided into three age groups. These are:
    • The young age group usually below the age of 18, which is considered to be the minimum age of adulthood. People below this age are not in the labour supply, i.e. they are not supposed to be working or looking for work.
    • The working age group, usually between 18 and 60, although the upper age limit for this group varies from country to country. In Kenya for example, for public servants, it is 55 years. It is the size of this group which determines the labour supply.
    • The old age group, i.e. above 60 years are not in the labour force.
  • The Working Population: Not everybody in the working age group will be in the labour force. What is called the working population refers to the people who are in the working group, and are either working or are actively looking for work, I.e. would take up work if work was offered to them. These are sometimes called the actively active people. Hence this group excludes the sick, the aged, the disabled and (full time) housewives, as well as students. These are people who are working and are not willing or are not in a position to take up work was given to them.
  • Education System and training: If the children are kept in school longer, then this will affect the size of the labour force of the country.
  • Length of the Working Week: This determines labour supply in terms of Man-hours. Hence the fewer the holidays there are, the higher will be the labour supply. This does not, however mean that if the number of working hours in the week are reduced, productivity if there is a high degree of automation.
  • Remuneration/wage rate: The preceding five factors affect the supply of labour in totality. Remuneration affects the supply of labour to a particular industry. Thus, an industry which offers higher wages than other industries will attract labour from those other industries.
  • The Extent to Barriers to Entry into a Particular Occupation: If there are strong barriers to the occupation mobility of labour into a particular occupation, e.g. special talents required or long periods of training, the supply of labour to that occupation will be limited.
  • Retirement age policy of the government.
  • Technology – means of production

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