1. Elasticity of demand for the final product::
If labor is producing a commodity with a very inelastic demand, an increase in wages will have a relatively small effect on the demand for labor. If the increase in wages is passed on in the form of higher prices, the fall in quantity demanded of the product will be relatively small. There will be a corresponding small reduction in the demand for labor. However, if the demand for the product is elastic, a small increase in price will lead to a relatively larger reduction in the quantity demanded; if an
increase in wages is passed on in the form of higher prices, there will be a large reduction in the demand for labor.
2. The proportion of total costs accounted for by labor costs:
If wages account for only a small proportion of total cost, the demand for labor will be inelastic. Some industries are labor-intensive e.g house building in the construction industry and therefore labor cost make up a large proportion of the total cost of production; other industries are capital intensive e.g oil refinery. If wages increase while productivity remains unchanged, the labor cost accounts for a greater percentage of the average cost in a labor-intensive industry. The effect of the increase in wages will be to raise the unit cost. In contrast, in a capital-intensive industry where labor cost form a lesser percentage of the average cost, an increase in wages will raise the unit cost at a lower percentage than in the earlier case. If the increased cost are passed on in the form of higher prices, the effects for demand of labor are likely to be much greater in the case of labor intensive industry.
3. Period of Time:
Demand for labor will be more elastic in the long run because it will take time for firms to change their production methods and replace workers with machines. Labor may also have fixed contracts and a period of notice has to be given.
Wilfykil answered the question on February 7, 2019 at 07:03
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