As with the market demand curve for any good, we find the market demand curve for labor by summing up the quantity of labor demanded for all the firms at each wage rate, holding all else equal. So we've got employment, usually measured in hours, and wages up here, and a downward sloping labor. demand curve.
When we hold all else equal, movements along the demand curve tell us how the quantity demanded of employment changes with the wage rate. But what about shifts of the demand for labor itself? We can think about changes in demand for the output good. Remember that the marginal revenue product of labor depends on the price of the final good, the output.
It's a derived demand. If the price of pizza increases, then each worker is more valuable even if they're producing the same number of pizzas. So demand increases.
If the price of pizza falls, then the demand for workers in the pizza industry falls. All of the things that shift the demand curve for pizza operate through this factor in changing the demand for workers in the pizza industry. Second, the price of capital.
Capital is the stuff like machinery, computers, and other things that the firm uses along with labor to create output. Now, there are two things that happen when the price of capital goes down. There's a scale effect where the cheaper capital means the business can produce more output.
So, the business will use more labor alongside that capital. But there's also a substitution effect where the company substitutes away from workers and towards capital because the capital is now cheaper. If the scale effect dominates, then capital and labor are complements. You can say K and L are complements. if the scale effect dominates the substitution effect.
And we can think of that technology as labor complementary. This is usually seen in more high-skilled work, like where cheaper computers leads to more demand for programmers. If the substitution effect dominates, Then capital and labor are substitutes.
This is a labor-saving technology. This is generally true for lower skilled routine work where a machine can do the job. Now third is productivity more generally. With human capital, workers can be more productive.
Whether it's education, on-the-job training, or experience, workers with more human capital produce more. So what happens? At each level of wages, Firms will demand more workers since they're more productive. Looking at it another way, for any quantity of labor, firms will be willing to pay more. Now management plays a role here too.
Better managers and management systems lead workers to be more productive, which increases the marginal product of labor, which in turn increases the marginal revenue product, which increases demand. Now fourth, there's non-wage benefits and taxes or subsidies. Notice that we have wages on the y-axis here but employers cost of labor is more than just the wages they pay to workers.
an issue we'll return to when we talk about the minimum wage. Changes in the cost of benefits, like health insurance, can shift employers'willingness to pay. If those costs go up, then the total cost of a worker is higher and that will be offset by a lower willingness to pay wages.
Same goes for some of the other government costs that employers pay. If employers have to pay more for, say, unemployment insurance, then their total cost per employee goes up, and that will be offset in their willingness to pay wages. The labor demand curve would shift to the left. At every level of employment, companies are willing to pay less in wages. The market for labor is a bit different than the markets for other goods.
But the same principles we consider for demand in other markets can still be applied.