The demand for labor

The demand for labor is broken into two parts. They are the demand for labor in the short run and the long run. The distinction between the short run and the long run is of fundamental importance. In its attempt to maximize profits a firm will adjust its use of labor, capital, energy and other factor inputs to achieve the lowest cost of production. If the relative price of labor should increase the firm is motivated to cut back on the use of labor and substitute capital and other factor inputs in its place. Every firm however needs time to order and put in place new machinery or to build a new more automated plant. This initial length of time when the firm is locked into a fixed amount of plant and equipment is defined as the short run. The long run is defined as the period of time after which the firm can change not only labor but the amounts of capital and all other factor inputs. The distinction between the short run and the long run is a conceptual one. In practice the actual length of the short run varies considerably from industry to industry. A textile firm for example could quite possibly purchase and put in place new more technologically advanced dyeing and weaving machines in several months. A new integrated steel plant on the other hand might take five (5) years or more to complete.

So the firm objective is to derive the firm’s demand curve for labor showing in the process the reason for the inverse relationship between the wage rate and the firms’ desired level of employment. Firms desired level of sales and its desired level of employment while focusing on the issues such as the impact of the business cycle and the gross profit.