Shifts in the demand for labor

0:00- [Instructor] We are now going to continue our study of labor markets, and in this video, we're going to focus on the demand curve for labor. So let's imagine that we're talking about a market for people who work in the pant making industry, so each of these firms right over here, they produce pants, let's say they produce bell bottoms.

0:22This is my quick drawing of bell bottoms, these are someone's pants right over here, they flare out at the bottom, and let's say for some strange reason, bell bottoms all of a sudden go back in style. So bell bottoms are going back in style. The first is, at least in the short run, is able to get more per unit for its bell bottoms, so its marginal revenue goes up, and if its marginal revenue goes up, its marginal revenue product is going to go up, and so we would have a shift to the right of the marginal revenue product curve, or you could even do that as a shift up.

0:58For a given quantity of labor, you're going to have a higher marginal revenue product, so we could call this marginal revenue product curve 2. Now what was likely to happen in the market? Well if it's a general fashion trend, it's not just for this firm's goods or product, but it's for everyone, all of the pant producers.

1:21Well then they're all going to want a lot more people who can work in the pant producing industry, or another way to think about it is the market labor demand curve is just a sum of the marginal revenue product curves for all of the various firms, and if all of them have shifted to the right or shifted up, well the same thing is going to happen to the market labor demand curve.

1:42And so the market labor demand curve might now look like this. So market, labor, demand, curve, sub 2. Now what does that do to the equilibrium wages and quantities? Well our equilibrium wage has gone up, which seems reasonable 'cause the demand curve has shifted to the right, and our equilibrium quantity has also gone up.

2:10I'll put a little Q sub 2. Now what does that do the marginal factor cost? For the firms operating in this market, the ones that are hiring this labor. Well, the wages have gone up so so has the marginal factor cost. So in this situation, we now have a marginal factor cost sub 2, and now we have a new quantity that is rational for this firm to actually go out and hire.

2:41And you can imagine things going the other way, so here, we saw things shift to the right, both the marginal revenue product curves and the market labor demand curve, but maybe things aren't going well, and the marginal revenue goes down for these firms. Well then you can imagine a situation where on the firm level, your marginal revenue product curve shifts down and to the left, maybe it does something like that, marginal revenue product 3, and in aggregate, that would cause the market labor demand curve to shift to the left, and you would see the opposite happen.

3:20You would see a lower equilibrium wage, let me just label this market, labor, demand, curve, 3. You would have a lower equilibrium wage now, and you would have a lower quantity of labor, equilibrium quantity of labor in that market, sub 3, and then you would have a lower, a lower marginal factor cost assuming a perfectly competitive labor market.

3:53And so this might be the equilibrium quantity right over there, Q for the firm, sub 3 with a star. Once again, not counterintuitive. This is what we've seen in other markets when we talked about what would cause shifts in demand. The firms for whatever reason are not able to get as much incremental benefit per unit, per extra unit of labor, well that's going to shift things to the left, both at the firm level and at the market level, and if for some reason the firms are able to get a lot more incremental benefit per extra unit of labor, well that's going to shift both the marginal revenue product at the firm level to the right, and the market labor demand curve at the market level to the right.