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Economic Theory

Shifts in the demand curve for labor occur for many reasons. One key
reason is that the demand for labor is based on the demand for the good or
service that is being produced. For example, the more new automobiles
consumers demand, the greater the number of workers automakers will

need to hire. Therefore the demand for labor is called a “derived demand.”
Here are some examples of derived demand for labor:

 The demand for chefs is dependent on the demand for restaurant
meals.
 The demand for pharmacists is dependent on the demand for

prescription drugs.
 The demand for attorneys is dependent on the demand for legal
services.

As the demand for the goods and services increases, the demand for
labor will increase, or shift to the right, to meet employers’ production
requirements. As the demand for the goods and services decreases, the

demand for labor will decrease, or shift to the left. Table 4.1 shows that in
addition to the derived demand for labor, demand can also increase or
decrease (shift) in response to several factors.

Shifts in labor supply. The supply of labor is upward-sloping and
adheres to the law of supply: The higher the price, the greater the quantity
supplied and the lower the price, the less quantity supplied. The supply
curve models the tradeoff between supplying labor into the market or

using time in leisure activities at every given price level. The higher the
wage, the more labor is willing to work and forego leisure activities. Table
4.2 lists some of the factors that will cause the supply to increase or

decrease.

Table 4.1 – Determinants of Labor Demand

Factors Results
Demand for When the demand for the good produced (output) increases, both the
Output output price and profitability increase. As a result, producers demand
more labor to ramp up production.
Education A well-trained and educated workforce causes an increase in the
and Training demand for that labor by employers. Increased levels of productivity
within the workforce will cause the demand for labor to shift to the

right. If the workforce is not well-trained or educated, employers
will not hire from within that labor pool, since they will need to
spend a significant amount of time and money training that
workforce. Demand for such will shift to the left.

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