Factors that affect labour supply and demand

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Factors that affect labour supply and demand
Company profits can play a crucial role in the demand for labour. (Getty Premium images)

The supply and demand of labour plays a crucial role in defining the strength and consistency of a country’s economy. The distribution of labour in the United Kingdom is influenced by a range of factors, from corporate profits to migration levels. Understanding the factors that affect the supply and demand of labour can help firms assess the current economic climate and plan successful business strategies.

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    Demand for labour

  1. 1

    Consider the wage rate in the region where you live. The demand for labour in the UK decreases as wage rates increase. At higher wage levels, companies seek to increase their capital reserves and invest in cheaper labour alternatives to preserve profits.

  2. 2

    Investigate the value of labour in a particular industry and assess how easily workers could be replaced by automated or machine-based processes. A reduction in the cost of high-specification factory equipment, for instance, could lead to a reduction in the demand for labour as firms seek to reduce their production costs.

  3. 3

    Assess corporate profit levels of firms in the UK Companies with higher profit levels have more money that can be reinvested into the business in the form of equipment or labour. Declining profits, in contrast, will lead to a drop in the demand for labour as firms seek to reduce expenditure.

  4. 4

    Check the output levels of workers in specific industries. If workers are highly productive, they ultimately yield greater profits for the company. Workers with advanced skills and training are likely to be more productive and therefore more in demand by businesses.

  5. 5

    Assess the demand for products in specific industries in the UK. The requirement for labour derives from the demand for products and services. The less products are desired by consumers or businesses, the less need there is for workers to provide them.

  1. 1

    Examine the age ranges of people living in different area. Men can work from the age of 16 in the UK and typically retire at aged 65, whereas the retirement age for women is 60. A high proportion of people lying within these parameters will increase the supply of labour. However, these numbers can be reduced by factors such as high levels of physical or mental illness among the population and young people attending university.

  2. 2

    Look at migration levels in specific regions and industries in the UK. Migrants tend to be young and eager to find work, so a high migrant population is likely to increase the supply of labour significantly. However, this increase is likely to occur at lower wage rates as most migrants tend to come from poorer economies, where low wages are commonplace.

  3. 3

    Calculate the benefits of working in addition to wages. Working can carry many other benefits such as generous holiday entitlement, job fulfillment, opportunities for promotion and flexible working patterns. Working can also provide psychological benefits by exposing people to broader social circles. These factors are all likely to increase the supply of labour.

  4. 4

    Consider the factors that make work more appealing. The supply of labour is likely to be higher if the “cost” of working is low. For instance, if childcare costs are low, work is more appealing to parents. Similarly, if unemployment benefits provided by the welfare state are much lower than the average wage, work becomes a more appealing choice.

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