Labor Demand Research Paper Starter

Labor Demand

(Research Starters)

This article focuses on labor demand. This article provides an analysis of the major U.S. labor demand policies. The relationship between labor markets, labor demand, labor supply, and wages is described. The U.S. Bureau of Labor Statistics' program to measure labor demand, through the Job Openings and Labor Turnover Survey, is discussed. The issues associated with forecasting labor demand across industries are addressed.

Keywords Budget Constraint; Economic Growth; Gross Domestic Product; Income Effect; Job Openings & Labor Turnover Survey; Labor Demand; Labor Economics; Labor Force; Labor Market; Labor Supply; Marginal Physical Product of Labor; Occupation; Opportunity Cost; Productivity; Reservation Wage; U.S. Bureau of Labor Statistics

Economics: Labor Demand


Labor economists, also referred to as demographic economists, study the relationship between labor supply and demand, wage distribution across industries, and changing demographic trends in an effort to explain and predict economic activity and business cycles. Labor economists argue that the aggregate labor, or productive work, of the population drives the economy and economic growth. Economic growth, the quantitative change or expansion in a country's economy, is measured as the percentage increase in a nation's gross domestic product (GDP) during one year. Gross domestic product refers to the market value of goods and services produced by labor and property in the United States. The United States government, recognizing the importance of a strong labor market, develops and implements labor demand policies to promote the creation of new jobs and work industries. Labor demand refers to both the total labor costs for a particular skill level and total output the firm is capable of producing to meet customer needs for profit maximization as well as the aggregate need for labor in a given region or sector. Increased labor demand will theoretically draw more workers into the workforce and increase productivity and economic growth.

Importance of Labor Demand

The public and private sectors, and economic stakeholders in general, rely on labor market information, economic analysis, and short and long-term forecasting for effective economic planning. For example, information about forecasted labor demand in different sectors and industries allows individuals to strategically plan their education and training to capitalize on labor demand. In addition, information about forecasted labor demand in different sectors and industries allows organizations to make strategic hiring decisions and investigate technology to lessen the burden of forecasted employee shortages. Businesses, industries, and occupations generally have differing levels of labor demand.

Labor Demand in Microeconomics

The concept of labor demand is a fundamental building block in microeconomics. Microeconomics, in contrast to the large-scale inquiry of macroeconomics, studies the behavior of small economic units including households, organizations, and individual consumers. The concepts of labor demand and labor supply are based on the economic theory of supply and demand that refers to the relationships between a product's place in the market and the market's valuing of the product. The theory of supply and demand is a fundamental economic theory applied to multiple businesses, industries, and issues. Labor economics, which refers to the area of economics concerned with labor markets, adopted the theory of supply and demand to help explain how labor markets function. Labor economists often represent demand and labor supply in a graphical way as supply-demand curves. These curves, which are common conceptual tools in economics, are two lines on a graph representing people's willingness to buy or sell a product depending on its price. The labor supply curve is likely to be different for different individuals and the labor demand curve will be different for various businesses, industries, and sectors.

Factors Affecting Labor Demand

The following factors and variables affect labor demand and labor supply in the United States: Budget constraint, rate of substitution, income effect, substitution effect, and opportunity cost. Budget constraint refers to the consumption options available to someone with a limited income to allocate among various goods. The rate of substitution refers to the least-favorable rate at which a business is willing to exchange units of one good or service for units of another. Income effect refers to the influence that a change in income will have on consumption decisions. The substitution effect is a price change that changes the budget constraint but leaves the consumer on the same indifference curve. Opportunity cost refers to the cost of passing up the next best choice when making a decision. Labor economists consider labor demand to be a derived demand. The demand for labor is dependent on or derived from the demand for particular goods in a particular market. A business' overall labor demand is determined by its marginal physical product of labor (MPL). The marginal physical product of labor refers to the additional output that results from an increase of one unit of labor. Ultimately, the demand for labor is an important economic indicator for the health of the labor market and the economy in general.

The following section provides an overview of U.S. labor demand policy. This section serves as the foundation for later discussion of how and why the U.S. government measures labor demand with the Job Openings and Labor Turnover Survey. The issues associated with forecasting labor demand across industries are addressed.

U.S. Labor Demand Policies

The federal government, recognizing the importance of a strong labor market, develops and implements labor demand policy to promote the creation of new jobs and work industries. The United States government creates policies and programs to increase labor demand. Labor demand policies are developed to increase the number of poor and disadvantaged persons hired into gainful employment. Significant labor demand policies of the twentieth century included the public works programs of the 1930s, public service jobs of the 1970s that were funded by the Comprehensive Employment and Training Act (CETA), and tax credits for employers hiring poor and disadvantaged individuals (Bartik, 2001).

Labor Demand Policies

Economists and government stakeholders in general debate the development and use of labor demand policy as a solution for the public problem of poverty and unemployment. Labor economists in favor of the use of labor demand policies to eradicate poverty argue that an increase in the number and scope of labor demand policies is necessary for several reasons. First, America's poor need significantly more jobs made available to them. The U.S. labor market would need at least 9 million additional full-time jobs to provide each poor, non-elderly U.S. household with one full-time worker. Second, labor supply policies alone may be insufficient to solve job shortages. Labor supply policies, such as welfare reform, are generally a costly way to increase employment opportunities for the poor. For example, welfare reform, which has brought millions of workers into the labor force, has required the development and implementation of extensive job and workforce training programs. Third, aggregate labor demand policies are necessary but insufficient to eradicate poverty and its related conditions. For example, in 1999, the U.S. unemployment rate was 4.2 percent and the poverty rate was 11.8 percent. As a result of the difference between poverty and unemployment rates, lowering unemployment to zero would not fully eliminate poverty. Fourth, targeted labor demand programs, such as programs that hire targeted low-employment groups for public service jobs or subsidized jobs with private employers, can be effective in addressing poverty and its related conditions.

Recommended Labor Policies

Labor economists generally recommend three types of labor demand policies: Tax credits, wage, subsidies and wage redistribution. First, a tax credit program can be implemented to provide subsidies to all employers who expand their labor force. Second, a wage subsidy program can be implemented which awards wage subsidies to selected employers that hire selected individuals from disadvantaged groups (Bartik, 2001). Third, a wage redistribution program can be implemented to redistribute and equalize wages. The main types of wages manipulated in labor demand policies include reservation wage, market clearing wage, real wage, minimum wage, and nominal wage. A reservation wage refers to the lowest possible real wage that makes workers indifferent between consumption and leisure. Market clearing wage are the wages necessary to clear the labor market of all surpluses and shortages. Real wages refer to wage amounts, useful for economic analysis and comparisons, which have been adjusted for inflation. Minimum wage refers to the lowest hourly wage, determined by the Fair Labor Standards Act (FLSA), that may be legally paid to full-time and part-time workers in the private sector and in federal, State, and local governments. Nominal wages are wages, written down in contracts between the employee and the organizations, which are unadjusted for inflation.

Criticisms of Government Labor Demand Policies

There are numerous criticisms of...

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