Course Code and Title: HRME5 – Compensation Administration

Professor: Dave Kieth J. Lappay

Lesson Number: 12
Topic: Labor Demand (continuation)

Learning Objectives:

At the end of this lesson, the student should be able to:

1. define labor demand,
2. identify the elasticity of labor demand in the market, and
3. explain the movement and shift of demand curve in labor.

Pre-Assessment
Direction: Read the questions carefully. Provide the answers in the separate sheet of paper/s.

1. What is the difference between labor demand and labor supply?

2. Why does demand for labor move in demand curve?
3. How do movement and shift in demand for labor differs?
4. How does elasticity work in demand labor?
5. Explain perfectly elastic and inelastic when it comes to labor demand.

Lesson Presentation:

The labor market, also known as the job

market, refers to the supply of and
demand for labor, in which employees
provide the supply and employers provide
the demand. It is a major component of
any economy and is intricately linked to
markets for capital, goods, and services.

The demand for labor encompasses the

determinants of the number of workers
that firms and others wish to employ along
with the intensity with which they are
utilized, particularly their hours of work.
Included is the demand for workers
treated as a single group and for workers
differentiated by their demographic
characteristics and level of skill. Among
the major issues are how employers react to changes in the cost of labor, or the cost of particular group(s) of
workers; how cuts in costs of employing one type of worker lead employers to substitute them for others, and
how the relative costs of workers and hours affect employers' choices between them. The theory underlying
these issues is discussed and an evaluation of the state of knowledge on all of them is provided. The evidence
is relevant for evaluating the impact of a wide variety of labor-market policies, including minimum
wages, overtime restrictions and penalties, and payroll taxes. Labor demand takes time to adjust, with the path
of adjustment determined by impediments imposed by the costs of hiring and firing and by government
regulations. The article summarizes the evidence on the effects of these costs and on the role of government
regulations in altering the level and time path of employment.

Key Factors: Industry / Occupational Labor Supply

1. Real wage rate on offer in the industry itself.

2. Extra pay such as overtime, productivity pay, and share options
3. Wages in substitute occupations such as increase in the earnings for plumbers and electricians may
cause people to switch their jobs.
4. Barriers to entry such as artificial limits to an industry’s labor supply (minimum entry requirements) can
restrict supply and increase wages
Elasticity of Labor Supply

Elasticity of labor supply measures the extent to which labor supply responds to a change in the wage rate in a
given time period.

Equilibrium Wages in the Labor Market

The equilibrium market wage rate is at the intersection of the supply and demand for labor. Employees are hired
up to the point where the extra cost of hiring an employee is equal to the extra sales revenue from selling their
output.

Key Causes of Pay Differentials in the Labor Market

1. Compensating wage differentials – A reward for risk-taking, working in poor conditions and during
unsocial hours.
2. Reward for human capital – Differentials compensate workers for (opportunity and direct) costs of human
capital acquisition.
3. Different skill levels – Market demand for skilled labor (with inelastic supply) grows more quickly than for
semi-skilled workers.
4. Differences in labor productivity and revenue creation – workers whose efficiency is highest and ability
to generate revenue for a firm often rewarded with higher pay.
5. Trade unions who might use their collective bargaining power to achieve a mark-up on wages compared
to non-union members.
6. Other artificial barriers to labor supply such a professional exams.
7. Employer discrimination – A factor that cannot be ignored despite over twenty years of equal pay
legislation in place.
Generalization:

Research has hardly begun to study how job creation is affected by wages and changes in product demand as
they lead new firms to open and existing companies to close. Evidence on these issues is important for analyzing
the impact on employment of such policies as tax holidays that local governments offer to firms. The ideal would
be estimates of opening-and closing-wage elasticities of labor demand that indicate how drops (rises) in labor
costs move potential (existing) companies across the margin of opening (closing) to generate changes in
employment.

Reinforcement:
Direction: Read the questions carefully. Provide the answers in the separate sheet of paper/s.

1. In order to minimize and avoid labor market failure, what are the policies made by government and
imposed to both private and public sectors in the Philippines? How does it affect the labor demand of the
country?

References:

https://www.investopedia.com/terms/d/demand_for_labor.asp
https://www.slideshare.net/tutor2u/tutor2u-labour-market-economics
https://www.sciencedirect.com/science/article/pii/B0080430767022804