[0:02]Hi there, here's a topic video on Labour Demand, as part of AS microeconomics. The demand for labor is basically how many workers a firm is willing and able to hire at a given wage rate in a given time period. The key thing is that the demand for labor is derived from the goods and services that labor produces. Now typically, the labor demand curve is similar to a demand curve for goods and services. Of course, we're thinking about labor as a factor of production here. So on the Y-axis we have the wage rate and on the X-axis, we have the quantity employed, the number of people employed, E. Our labor demand curve is normally downward sloping, so at lower wages, more people are employed and at high wages, fewer people are employed. So therefore we tend to assume there's an inverse relationship between demand for labor and the prevailing wage rate. For example, if the wage rate's very high, it's probably costly to hire extra employees. The marginal cost of taking on extra worker could be, could be pretty expensive. But when wages fall, labor may become relatively cheaper than capital. And as in most markets, think about the substitution effect, and an income effect. So if the wages go down, a firm can employ more people, and given that capital could be a substitute for labor, if wages fall, then labor become, can become more cost effective compared to capital equipment for example. So higher wages cause a contraction of labor demand and lower wages cause an expansion down the labor demand curve. What about some of the factors that affect the demand for labor?
[1:46]Again, keep in mind key revision point that the demand for labor is derived from the goods and services that people who are employed actually then produce. So what are some of the key factors that cause a shift in labor demand? One of the most important ones is the level of labor productivity, for example, measured by output per person hour or output per person employed. So if labor is fairly productive, then the unit cost of the output that labor produces will be, will be lower. Potentially the value of the output that they create will be higher. High labor productivity can generally increase labor demand. Second key factor is the relative cost of using capital. So if capital becomes relatively cheaper, some firms may replace workers or labor with capital machinery. For example, in the security industry, they might replace security workers with cameras or other forms of security device. Another important cost is the cost of employing people in terms of payroll taxes. So in the UK, we have national insurance contributions paid by both the employee and the employer. And if they go up, then it can become more expensive to employ people. Conversely, the government's recently cut national insurance contributions if firms take on long-term young unemployed workers. That reduces the cost of employing people and will increase labor demand. Very important to realize that the demand for labor is linked to the final output they produce. So in most labor markets that we look at, some of the demand for labor is cyclical in nature. It tends to go up in a, an economic recovery. It tends to fall sometimes in a slowdown but obviously in a recession. Another key factor is the relative productivity of labor-saving technologies, so it's not just the cost of capital, but also the efficiency of capital. And as robotics and new technology becomes more widespread in many industries, perhaps many jobs will be lost. Although equally, you also have to think about the people who train workers to use new technology, people who make the new technology and those who install it. A really final important point is that the macroeconomy has quite a big effect on labor demand. The external macroeconomic environment has a significant impact. For example, my my picture here shows the global steel, a big steel works in, in Wales. We've seen in recent months how a fall in the world price of steel caused in large part by there being chronic excess capacity in the industry, has threatened many thousands of jobs in the UK steel sector. So the demand for labor in steel has been shrinking, largely it has to be said because of the external macroeconomic environment. So how do we show shifts in labor demand? Well, it's very similar to your price theory diagram. The labor demand curve will shift position when there is a change in one or more of the conditions of demand. Take for example, a cyclical recovery in the economy, increasing demand for a product causes the labor demand curve to shift out from LD1 to LD2. Higher productivity of labor would also have a similar effect. Perhaps a government subsidy to allow businesses to employ more workers. All of those would shift labor demand out from LD1 to LD2. However, as we've just discussed, a recession, or a significant slowdown in demand, could cause the demand for labor to shift inwards from LD1 to LD3. Couple of charts just to by way of illustration of what we're talking about. I said that the demand for labor in many industries was cyclical and I think a really good example of this is the construction industry in the UK. Take a look at the number of people in work in the construction, the building industry in Britain. It rose pretty strongly from the period 1997 through to 2007. Indeed, over that period, more than 500,000 extra people were employed in construction. But then, as you can see, from 2008 to 2009, employment fell quite sharply, particularly in 2010. And in fact the industry lost around 300,000 jobs in that period.
[6:38]Construction's picking up again, as you can see in 2015, but employment is still below the level in 2009. So there's a good example of where employment, the demand for labor has a cyclical dimension. And if we take a long-term view, here is a graph showing a structural decline in the demand for manufacturing jobs. This is an aspect called deindustrialization, take the UK's manufacturing employment since 1978. In that year, nearly 7 million people were employed in manufacturing. Deep recession in the early 80s, deep recession again in the early 1990s and another recession from 2008. We can see that although it's stabilized in just the last few years, particularly in things like car making, less than 3 million workers are now working in what is called manufacturing industry. In other words, the level of manufacturing demand for labor has more than halved over the last 35 years. Big issues, of course, to do with robotics, automation, what extent our jobs at risk by automation. Quite interesting survey came out from Citi Group using World Bank data. A few weeks ago, in fact, in the UK, around a third of jobs are reckoned to be at risk from automation. That's of less than the United States, less than the OECD average, critically in countries like Ethiopia, a lot of jobs, perhaps up to four fifths of the workforce have their jobs at risk of automation. And I think that's pretty much because of the of the uh, the likely increase in automation, capital intensity in what is highly labor intensive farming in the next 10, 20 years. Certainly an issue to keep a, keep a breast on. So here we go. Uh, we've just been looking at some of the key factors affecting labor demand.
