Labor Demand Curve
What is Labor Demand Curve?
The labor demand curve shows how many workers a firm hires at each wage, and for a single firm it is simply its marginal revenue product curve.
Labor demand is derived demand: a firm wants workers for the revenue their output brings in, not for their own sake. A profit maximizer keeps hiring while the marginal revenue product of the next worker exceeds the extra cost of employing them, and stops where MRP equals the wage. That makes the firm's labor demand curve identical to the downward sloping part of its MRP curve. It slopes down because of diminishing marginal returns, since each extra worker adds less output than the last. Demand comes from employers and shifts when the product's price, worker productivity, or the price of a related input changes, while a change in the wage alone only moves the firm along the curve.
Labor Demand Curve: a worked example
A car wash sells every wash for $12 and is too small to affect that price. The first worker adds 20 washes a day, the second 17, the third 13 and the fourth 9, so their marginal revenue products are $240, $204, $156 and $108. At a daily wage of $150 the firm hires three workers, because the third brings in $156 and the fourth only $108. If the wage falls to $100, the fourth worker is worth hiring at $108. Those two pairs, $150 with three workers and $100 with four, are two points on the firm's labor demand curve.
The mistake students make with labor demand curve
Students often say the labor demand curve slopes down because firms want to pay less, or because consumers buy less of the product. It slopes down because of diminishing marginal product: the next worker adds less output, so the revenue that worker generates falls. A change in the wage never shifts labor demand; only something that changes MRP, such as the product's price or worker productivity, shifts the curve.
Labor Demand Curve questions
Why is labor demand called a derived demand?
Labor demand is derived because employers value workers only for the output and revenue they produce, so it comes from demand for the product. When demand for the good rises and its price goes up, every worker's marginal revenue product rises and labor demand shifts right. A collapse in product demand shifts labor demand left even though workers are just as productive as before.
Is the labor demand curve the same as the MRP curve?
Yes, for an individual firm the labor demand curve is its marginal revenue product curve. The firm hires until MRP equals the wage, so at any wage you can read the quantity of labor demanded straight off the MRP curve. Market labor demand is then built by adding up the quantity every firm demands at each wage.
What shifts the labor demand curve?
Labor demand shifts when the product's price or demand changes, when worker productivity changes, or when the price of a substitute or complementary input changes. Cheaper machines that replace workers shift labor demand left, while cheaper machines that workers operate alongside can shift it right. The wage is not a shifter, it moves the firm along the existing curve.
Formula / Example
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