What is meant by the derived demand for labour why is the labour market regarded as a factor market?

Essay by AzTeKHigh School, 12th gradeC, July 2005

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Labour is the human element in the production process. It is the intellectual and physical effort of people in production. The labour market is a factor market where the demand and supply of labour interact to determine the wage rate and the allocation of labour resources in the economy.

The demand for labour is derived form the demand for the goods and services that labour is used to produce. The demand for labour is influenced by the level of economic activity, the productivity of labour and relative cost of labour compared to capital. Supply of labour refers to proportion of wrking age population making itself available for work. In a competitive labour market, the interaction of the demand and supply for labour will determine wage rates and the allocation of labour resources.

The Demand and supply of labour are influenced by both macroeconomic and microeconomic factors. Macroeconomics refer to conditions in the whole economy affecting the general labour market. Microeconomic factors include specific industry and firm conditions that influence the demand and supply of labour for particular occupations and labour skills.

The demand for labour at a microeconomic level are influenced by a number of factors that are industry or firm specific, these include the nature and size of the industry, the pattern of consumer demand and output, the wage rate and conditions of employment offered, the productivity of labour, the rate of capital/labour substitution and the rate of structural change and entrepreneurial expectations.

Large labour intensive industries such as TCF's and service are usually big users of labour. Traditionally industries like mining and building were labour intensive jobs but in developed countries these industries have turned to being capital intensive industries. The nature of an industry's output also influences the quality of labour demanded; for e.g. professional...