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Demand for Labour

The demand for labour is a derived demand. The labour is demands because it helps in the production of goods and services. The demand curve for labour is derived from the production. The demand for labour depends upon its marginal productivity. Under competitive conditions, so long as the cost of hiring an additional unit of labour is less than the marginal revenue gained, firms will continue to employ additional units of labour. The cost of labour is expressed in terms of money wages (W) or real wages (W/P), i.e., wage divided by the general price level. Similarly, the revenue derived from labour can be expressed in terms of the marginal physical product of labour (i.e., MPP_N) multiplied by the general price level.

Symbolically, money wages can be expressed as follows:

W = P . MPP_N

where, W = money wage,

P = general price level, and

MPP_N = marginal physical product of labour.

Equation shows that the money wages is equal to MPP_N multiplied by P.

The same idea can be expressed in terms of real wages by dividing both the sides of equation by general price level (P). We get,


where, W/P is the real wage, which is equal to marginal physical product of labour.

Since, MPP_N= W/P , the demand for labour is also a function of real wages, i.e.,

D_N= f(W/P)