Shifts in Labor Demand: Study with Video Lessons, Practice Problems & Examples

Shifts in labor demand can occur due to changes in output price and technology. An increase in output price raises the marginal revenue product (MRP), shifting labor demand right, while a decrease lowers MRP, shifting it left. Technological advancements can either substitute for labor, reducing demand, or complement it, enhancing productivity and increasing demand. Labor-saving technology decreases the quantity of labor hired, while labor-augmenting technology increases it, demonstrating the derived demand for labor based on productivity and cost considerations.

Shifts in Labor Demand:Output Price

So just like we saw shifts in the demand curve and the supply curve when we were talking about product markets and learning supply and demand, we see the same thing here. There can be shifts in the demand and supply for labor. Alright, so let's start with one of the shifts in demand and that is the change in the output price. Let's check it out. Okay, so the demand curve, right, it can shift left or right just like with goods. The first one we're going to talk about here is a change in the output price. So remember the output price, this is what we're selling our product for. So when we were talking about the production function, we were selling our pizzas for $5 but what if the price of the pizza changed, what if it went up or down? Well remember that our demand curve has to do with the marginal revenue product, right? The marginal revenue product is our demand curve. So remember that the marginal revenue product is price times MPL. This price, that is the output price. So if that output price changes, it's going to change our marginal revenue product and it's going to change our demand for labor, okay? So if the output price increases, well then our labor demand shifts to the right, okay? That's a good thing for us. The output price increases, there's a higher price, we can sell each pizza at a higher price, that's good. If the output price decreases, well it's going to shift our labor demand to the left, right? So we're not going to want to hire as many workers when there's a lower price. So let's go ahead and just look at an example here and see how this is going to affect the number of workers we hire.

This is that same example we've been dealing with where there's a pizza shop selling pizzas here and our original example when we studied the production function was an output price of $5, right, and we have a wage of 80 and that $80 wage is going to stay constant in both of our cases. Okay, so this was our original case where we had $5 per pizza and I've got it all filled out here. We discussed that we would end up hiring 4 workers right? We would hire these 4 workers because that's where our marginal revenue still exceeds our marginal cost, right? Once we hired that 5th worker, we had negative marginal profit for that 5th worker and we don't wanna hire them because we'll make less money. Cool? So we discussed that already, but now let's see what happens when we change the price.

Okay, so the price was $5 but now let's say the output price dropped to $2 per pizza. Okay, so from 5, now we're talking about 2, but the wage is the same, right? We still got an $80 wage. Now this isn't going to affect our marginal product of labor, right? The marginal product of labor, it's just how many workers do we have, it doesn't matter the output price or anything. We're going to have that same marginal product of labor based on the number of workers we hire, but the marginal revenue product, remember that does change because we're going to have the price times the MPL. So now instead of multiplying that MPL times 5, we have to multiply it by 2. So you're going to imagine that all our marginal revenue products are going to be lower than at the $5 price.

Alright, so let's start here. When we had 1 worker, our MPL was 30, so we're going to do $2 times 30, right? We're not doing $5 times 30, 2 times 30 that gives us a marginal revenue product of 60. How about 50? The next the second worker brings in 50 extra pizzas times $2 that's $100, right? 50 times the $2. The 3rd worker brings in 70 extra pizzas times $2. Well, our MRP 70 times 2, that's a $140 and then again 30 times 2 that's $60 here and the final worker bringing in 10 extra pizzas times the $2 well he's only going to bring in an extra $20 now. So notice how all these MRPs are lower than our example above, right? All the MRPs have come down because the price has come down. So you can imagine, remember we're setting that MRP equal to the wage. We want to find that profit maximizing quantity of workers where the MRP equals wage. So if this MRP is lower, we're getting closer to the wage sooner, right?

So let's see what happens here. The wage hasn't changed, right? And remember that that wage is still our marginal cost because all our other costs are fixed, right? There are no other costs here. We're just hiring an extra worker each time. Okay? So when we have 1 worker, well, we gotta pay him $80. The second worker also gets $80 and it's just $80 all the way down here, right? We're not adding the cost of all of the workers each time because it's the marginal cost. We already had 1 worker, we were paying $80 now we're gonna get a second worker, we got to pay an extra 80, not the total amount, okay?

So let's go ahead and calculate our marginal profit in each case and that's going to be this MRP minus that marginal cost, minus the wage, right? I'm going to put wage there. MRP minus the wage, okay? So let's go ahead and do this. 60 minus 80. Well, you're seeing already. Look at this. This is a negative profit here on the first unit, but how about the second or not unit, 1st worker. 2nd worker, well he brings in a $100 minus the 80 of his wage. Well, this one has a positive 20, right? A $100 marginal revenue product minus $80 wage gives us 20. The next one, 140 minus 80. Well here it's still going up. Now we're getting 60. Cool. How about that 4th worker? Remember, last time we wanted to hire the 4th worker, right? Because he was still bringing us money, But now check it out, the marginal revenue product of the 4th worker is only 60 and we gotta pay him 80. So this is going to be negative 20 in this case right? We're losing money on the 4th worker now because of the lower price. Last but not least, 20 minus 80 right? This last worker we weren't even hiring him before so you can imagine we're not gonna hire him now when we're making even less money off him. 20 minus 80 that's negative 60. So notice what happens here. You might first instinct be hey, we lose money on the 1st worker, it's negative 20 off the bat, we don't hire anybody. But that's wrong, right? Because we do start making money on the second and third worker. If you were going to look at total profit, we would have total profit when we had the third worker, right? The first worker has negative 20, the second worker has 20 so they offset. It's like with 2 workers we are breaking even, but that third worker does make us 60 more bucks. Bucks. So we come out on top with 3 workers here, right? We don't want that 4th worker because we start losing money again. So we're going to stop right here at 3 workers. So what has happened? The output price decreased, it decreased our marginal revenue product and thus we've hired fewer workers here. Alright? So that's how the output price can affect the demand for labor here.

Alright? So let's go ahead and move on to the next video.

Shifts in Labor Demand:Technological Change (I)

Alright. Something else that can shift the demand for labor is changes in technology. Let's check those out. So technological change can either be a substitute for labor or, what do you think the other one is going to be? A complement to labor, right? We've talked about these before in product markets, but it's going to be a little different here. So let's check it out. A substitute technology is something you're substituting for labor. Instead of using labor, you're going to use this technology instead, right? It's going to be cheaper than the labor. This is a labor-saving technology, and it's going to shift the labor demand to the left. We're going to demand less labor because we're going to use the technology instead. So it kind of goes like this: we've got a labor-saving technology, and it's cheaper to use the technology instead of hiring laborers, so we're going to need fewer workers to maximize profit, right? That's going to shift our demand to the left. So let's check out this example here about labor demand shifts.

Alright, the producers of really cool hats originally hired many laborers to customize their really cool hats. However, a new fashion-forward robot can produce really cool hats more efficiently than the laborers. So, what will happen to the demand for really cool hat laborers? This isn't the demand for really cool hats; this is the demand for really cool hat laborers, right? The quantity of laborers we're going to hire to produce these really cool hats. So right here, this is the same graph we were dealing with where we're going to have wages \( W \) on the y-axis, and the quantity here on our x-axis, right? And this is the quantity of laborers that we would hire. So if this were the original situation where we have the supply and the demand for labor, well, now there is a shift to the left for the demand for labor, right? Because now we're going to use robots instead of hiring laborers. Well, this is what's going to happen. We're going to take that demand curve, shift it to the left just like we're used to, right? So what's going to happen here? We had an original wage up here, right? This was going to be the original wage, and this was the original quantity demanded, or equilibrium quantity I should say, quantity demanded, and quantity supplied. Well, now we have this shift and this is our new equilibrium right here. So what's going to happen? Well, we're going to have a lower wage, right, the wage 2, it decreased and the quantity 2, it also decreases here as well, right? So we're going to hire fewer workers. There's less demand for the labor; this looks like what we studied when we studied supply and demand, right, but now we're just thinking about demand for labor. Cool? So let's go on in the next video; let's talk about the complementary technologies. Alright, let's do that now.

Shifts in Labor Demand:Technological Change (II)

Alright, so we just talked about substitute technologies, now let's deal with the complementary technologies. These technologies we're going to say are labor augmenting. Okay? So when we say augmenting, it's going to change the way that the laborers work, right? There's this new technology that's going to change how they work and essentially make them more productive, alright? So, it's going to shift the labor demand to the right. And this is because we're going to have higher MPL, right? So, we have this labor augmenting technology. Well, there's going to be more MPL, right? More marginal product of labor. Each laborer is going to be more productive and be able to add more MPL. When we hire one more worker, we're going to get more out of them. Okay? So since we're getting more MPL from each worker, what we're going to need more workers to maximize our profit, right? Because each one's making more MPL, you can imagine that we could hire more workers before reaching that MRP equals wage condition, right? Where we stop hiring. So, the labor augmenting technology, we're increasing productivity, right? So that MRP is going to go up. Okay.

So let's check this out. The producers of really cool hats, so this one's going to be a little different. Notice how it changes. The producers of really cool hats originally hired many laborers to customize their really cool hats. The invention of a futuristic needle allows workers to produce hats twice as fast, right? So notice compared to when we were talking about substitute, there was a fashion-forward robot that was going to replace the worker. Here, the worker does not replace, right? It's the tools that they're using that are changing, right? Before they had some different needle, now they have some super needle that makes them work faster. So we can't get rid of the workers, we still need the worker to use the technology, but they're more productive, right? So since they're more productive, we're going to have more demand for labor because we're going to have a higher higher MRP coming from each worker. So the demand for labor is going to shift to the right here, and we would have some situation, right? Same graph we were looking up above, we've got a supply, demand, this is our wage axis, our quantity of workers axis, and we had our original equilibrium right here, right, where we had q1 and wage 1, w1. Well, let's shift to the right this time, right? The demand's going to shift to the right and we would be somewhere say here, right? The demand shifts to the right there and we've got a new equilibrium right here. So what's going to happen?

The quantity increases, right? And we also see the wage increase over here, right? Wage is going to increase at the equilibrium point as well. So just like we saw with a product market, excuse me, just like we saw in product markets, we're just shifting curves and finding new equilibriums. We've done all this before, right? So it's pretty simple. We're just applying it to a new topic. Cool? Let's move on to the next video.

Here’s what students ask on this topic:

What causes shifts in the labor demand curve?

Shifts in the labor demand curve can be caused by changes in output prices and technological advancements. An increase in the output price raises the marginal revenue product (MRP), shifting the labor demand curve to the right, while a decrease in output price lowers the MRP, shifting it to the left. Technological changes can either substitute for labor, reducing demand, or complement labor, enhancing productivity and increasing demand. Labor-saving technology decreases the quantity of labor hired, while labor-augmenting technology increases it.

How does a change in output price affect labor demand?

A change in output price directly affects the marginal revenue product (MRP) of labor. If the output price increases, the MRP increases, shifting the labor demand curve to the right, indicating a higher demand for labor. Conversely, if the output price decreases, the MRP decreases, shifting the labor demand curve to the left, indicating a lower demand for labor. This relationship is crucial for understanding how businesses adjust their labor needs based on the prices they can charge for their products.

What is the impact of labor-saving technology on labor demand?

Labor-saving technology acts as a substitute for labor, reducing the demand for workers. When businesses adopt labor-saving technology, it becomes cheaper to use technology instead of hiring labor. This shift causes the labor demand curve to move to the left, leading to a decrease in the quantity of labor hired. This is because the technology can perform tasks more efficiently or at a lower cost than human workers, reducing the need for labor.

How do complementary technologies affect labor demand?

Complementary technologies, also known as labor-augmenting technologies, increase the productivity of workers. These technologies enhance the marginal product of labor (MPL), making each worker more productive. As a result, the marginal revenue product (MRP) increases, shifting the labor demand curve to the right. This leads to an increase in the quantity of labor hired and often results in higher wages, as businesses seek to maximize profits by employing more productive workers.

What is the difference between labor-saving and labor-augmenting technologies?

Labor-saving technologies substitute for labor, reducing the demand for workers by performing tasks more efficiently or at a lower cost. This shifts the labor demand curve to the left. In contrast, labor-augmenting technologies complement labor by increasing worker productivity. These technologies enhance the marginal product of labor (MPL), leading to a higher marginal revenue product (MRP) and shifting the labor demand curve to the right. As a result, businesses hire more workers and often pay higher wages.