This then means that the labor supplies decreases. The situation is best revealed by the chart below, which presents how the VMP and MRP curves, with their decreasing marginal productivity, generate a reduced demand for labor:
Source: McDonnel, B.M., Chapter 5, p. 136
Short-Run Demand for Labor: The Imperfectly Competitive Seller
This situation is the most common one in the actual market place and it basically means that each economic entity has the right to establish its retail price based on organizational determinants, unlike the case of the perfect competition, where the price is set by the market.
The demand for labor in this situation is directly linked to intense competition in the market and the strategies that derive from it, such as cost reduction, increased production or the creation of economies of scale. In the imperfect market then, the demand for labor will decrease as the marginal product decreases with every unit of employed workforce. The chart below reveals the scenario:
Source: McDonnel, B.M., Chapter 5, p. 142
The Long-Run Demand for Labor
Long-run estimations foresee that labor (as resource) and output are variable and attempt to see how labor demand changes in the given circumstances. It concludes that the demand curve follows a descendant trend. This is explained by the fact that a newly employed or recently fired individual, with the consequent changes in employees' wages, will generate a short-term effect on output and a long-term substitution effect. In some situations, a combined effect can occur. Both these forces, alongside with the demand for the product manufactured, technological advancements or relationship between workforce and capitals have the capacity to positively or negatively influence the demand.
The Market Demand for Labor
However identifying the market demand for labor would seem like a simple matter, it is fact hardened by the need to consider several constants as variables. In other words, what was constant within the organization, may easily be viewed as variable in the market context.
Source: McDonnel, B.M., Chapter 5, p. 149
Given that an organizational constant, but a market variable, such as the wage of the employee, decreases, the demand for labor will increase as economic entities will hire more to produce more. The retail price of the manufactured item will also decrease; the marginal revenue product will also follow a descendent trend.
Elasticity of Labor Demand
The previous parts of the chapter have concluded that the labor demand on the short-term is less elastic than the demand on the long-term. It now sets to identify the factors which influence this elasticity. The author finds them to revolve around the calculation of the elasticity coefficient (wage elasticity coefficient as a result of the percentage change in quantity of labor demand divided by the percentage change in the wage rate), the total wage bill rules, the elasticity of the item produced, labor costs in total costs, inputs and supply elasticity.
Determinants of Demand for Labor
The most important forces which influence labor demand are the productivity of the respective organization, the market demand for the respective product or service, the size of the staff employed...
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