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Demand And Supply Theory Of Wages
We have studied various theories which explain the determination of wages but they all stand discredited as they do not offer satisfactory explanation of wages. The modern economist are of the opinion that just as the price of a commodity is determined by the interaction of the forces of demand and supply, the rate of wages can also be determined in the same way with the help of usual demand and supply analysis. Let us now discuss in brief as to what we mean by demand for and supply of labor.
Demand for Labor:
There are various factors which influence the demand for labor. These factors in brief are as under:-
Demand for labor is a derived demand. The demand for labor is not a direct demand. It is derived from the demand for the commodities and services it helps to produce. If the demand for a product is high in the market, the demand for labor producing that particular type of product will also be high. In case, the demand for a commodity is small, the demand for that labor will also be low.
Elasticity of demand for the product if the demand for a particular product is inelastic, the demand for the type of labor that produces this product will also be inelastic The demand for labor will be elastic, if cheaper substitutes of the product are available in the market or the demand or the commodity it produces is elastic.
Proportion of labor cost to total cost If the wages of workers account for only a small proportion to total cost of a product, then the demand for labor will tend to be inelastic. In a capital intensive industry, for instance, a slight increase in the workers’ wages with have little effect on the unit cost of product; so, the rise in wages will not reduce the demand for labor.
Availability of substitutes for labor if the substitutes of labor producing a particular product are easily available in the market, the demand for labor will then be elastic
After considering the various factors which influence (he demand for labor, we now take up the demand price of labor.
Demand Price of Labor:
Marginal Revenue Productivity (MRP) An employer hires labor in order to make profit. He, while employing a worker, compares the cost of hiring a worker to the contribution he is expected to make to the total revenue of the firm. So long as the addition made by the labor to the revenue is greater than the cost of employing him, the entrepreneur will engage that labor. In other words, we can say that so long as the marginal revenue product of labor is higher than the cost of employing him, the employer employs that worker. The entrepreneur will continue hiring the worker up to the point at which the cost of employing a worker is just equal to the marginal revenue product of the labor.
The marginal revenue productivity of labor due to the operation of law of diminishing returns decreases, as more workers are put to work. The wage rate also decreases with the fall in the MRP of labor. Thus the demand curve for labor is downward, sloping (The demand curve for labor is the MRP curve of the firm as each worker earns what his labor is worth). If we add up the demand curves for labor of all the individual firms (the MRP curves) we get the demand curve of the industry, it is the demand of the industry which determines wage rate for labor. The individual firm in a competitive market has to accept wage rate set in the market.
Supply of Labor:
Supply of labor is the number of hours of work which the labor force offers in the factor market. The supply of labor for the entire economy is influenced by various factors such as wage rate, size of population, age composition, availability of education and training, the length of training period, provision of opportunities for women to work, the social security programmers etc., etc. The supply of labor for the industry as a whole is less elastic in the short-run. The supply of labor here depends on the availability of workers in the locality and from the nearby areas and the willingness of the labor to work overtime. In the long-run, the supply of labor for the industry is more elastic. The labor can be attracted by offering higher wages, providing training facilities, making working conditions pleasant etc, so the supply of labor for the industry is of the normal shape rising upward from left to the right.
Wage Determination:
So far we have discussed the forces operating behind the demand for and supply of labor in the market. As regards the price or the wage of particular grade of labor, it is determined by the interaction of the forces of. Demand for and supply of labor in the competitive market.
