Short Notes on Long-Run Demand Curve for Labour

In the long run, all factors of production are variable. Again for simplicity, let us limit ourselves to two factors labour and capital. Now, the total output produced depends not just on the amount of labour used, but also on the amount of capital.

Unlike the commodity market, there is a third effect called the profit maximising effect (PME) which is also a part of the price effect i.e., PE = SE + OE + PME

Now, under substitution effect (SE), labour is substituted for capital. So, the MRP curve shifts leftwards. But, under output effect (OE) and profit maximising effect (PME), both labour and capital are increased. So, MRP is shifted to the right.

The OE and PME are generally considered stronger than the SE so that the overall impact on the MRP is to shift it to the right. In Fig. 17.3, original equilibrium is at e, with a given wage rate w, and given price of P. With a fall in wage rate to w₂, the producer should move to if everything else remains constant.

Image Source: web-books.com

But, everything else doesn’t remain constant. The OE and PME shift the MPP curve rightwards to MRP₂ so that at the lower wage rate, the producer employs L₂ units of labour. Similarly, with further fall in wage rate to, MRP shifts rightward to MRP,

The long run demand curve of labour is thus the locus of points on shifting MRP curves as wage rate changes. (Fig 17.3) A reduction in the wage rate reduces the cost and hence induces the firms to

produce more. Thus, the demand for all other inputs along with this cheap labour rises on account of output effect.

Further, a fall in wage rate makes labour relatively cheaper resulting in its greater use on account of substitution effect. Here, AW = MW = w (wage rate) on account of perfect competition.

The demand for labour thus depends on:

(i) Price of labour (wage rate)

(ii) MPP_L derived from the production function

(iii) Price of the commodity

(iv) Amount of other factors combined with labour. An increase in collaborating factors will shift the MRP_L to the right and hence increase their WMP.

(v) Prices of other factors, since these will determine their demand and hence the demand for labour.

(vi) Technological progress because this leads to changes in MPP of all inputs and hence their demand.