Question

What are the factors that would determine the supply and demand for labor in a perfectly competitive labor market?

Answer 1

The equilibrium in the labor market occurs at the point where labor demand and labor supply curve intersects. There are various factors that cause shift in the labor demand and labor supply curve. The factors which lead to shift in the labor demand curve are as follows:

a. Demand for output: As the demand for output increases, producers demand more labor and thus labor demand curve will shift to right and as the demand for output decreases, the labor demand curve will shift to left.

b. Education and Training: If the workforce of a country is well educated and well trained, then this leads to an increase in the demand for that labor by employers. On the other hand, if the workforce is not well educated and well trained, then this will lead to fall in labor demand.

c. Technology- Technology may act as substitute or complement to the demand of labor. If it acts as a substitute, then it will reduce the demand for labor and if it acts as a complement, then demand for certain types of labor will increase. It depends on the nature of the technology used.

d. Prices and availability of other inputs: The demand for labor also depends on the price and availability of other inputs in the production process. It depends on whether the input is a substitute or complement of labor.

e. Number of companies: An increase in the number of companies producing a particular product will increase the demand for labor and decrease in the number of companies producing a product will decrease the demand of the product.

The factors that determine the supply of labor:

a. Number of workers: An increase in the number of workers will cause the supply curve of labor to shift rightwards. A decrease in the number of workers will cause the supply curve of labor to shift to left.

b. Required Education: The more the required education for a particular job, the lower is the supply of labor for that job. The less the qualification required for a particular job, the more is the supply of labor.

c. Government Policies: Government may set high qualifications for a certain job that requires academic training, certification, experience etc. As these are made tougher, the number of qualified workers will decrease decreasing the supply of labor and vice versa.