Factors that Cause a Shift in the Labor Demand Curve

Updated Jan 3, 2023

The labor demand curve represents the value of the marginal product of labor. That means it shows how much an additional unit of labor is worth to producers and how much work they need. Starting from there, we can identify a number of factors that can cause a shift in the labor demand curve: the output price, technological change, and the supply of other factors of production. We will look at them in more detail below.

1. The Output Price

When the output price changes, the value of the marginal product of labor (which is calculated as marginal product * output price) changes as well. This, in turn, shifts the labor demand. An increase in the price of a firm’s output raises the value of each worker’s task, which leads to an increase in the demand for labor (i.e., the labor demand curve shifts to the right). On the other hand, a decrease in the output price lowers the value of the marginal product and therefore results in a leftward shift of the labor demand curve.

To illustrate this, let’s look at a pineapple farm. Whenever the price of a pineapple increases, the value of the labor workers put in to pick them rises as well. In this case, producers can earn more money if they can harvest more pineapples, so they hire more workers and the demand for labor increases. As a result, the labor demand curve shifts to the right. By contrast, if the price of a pineapple falls, the workers generate less value, and the labor demand curve shifts to the left.

2. Technological Change

Technological improvements can increase labor productivity, which raises the value of the marginal product and thus shifts the demand for labor. That means, whenever scientists and engineers find a new way to produce goods and services faster and at lower costs, the value of each working hour increases because it leads to higher output than before. This increases the demand for labor, which shifts the demand curve to the right.

To give an example, let’s revisit our pineapple farm. Suppose that the farmers have found a way to double the number of pineapples that can grow on one pineapple tree by adding a new type of fertilizer to the soil. This allows them to harvest twice as many pineapples in the same period, which means they need additional labor, and the supply curve shifts to the right.

3. The Supply of Other Factors of Production

Finally, the supply of other factors of production (apart from labor) can have a significant impact on the value of the marginal product of labor, which can lead to shifts in labor demand. In most cases, an increase in the supply of other factors of production raises labor productivity, which shifts the labor demand curve to the right, and vice versa.

For example, if the supply of knives falls for some reason, the productivity of pineapple pickers suffers. They cannot pick the same amount of pineapple if they have to use blunt knives or even share knives among coworkers. As a result, the demand for workers decreases, and the labor demand curve shifts to the left. By contrast, if they get access to more and better knives, their productivity increases, the marginal product rises, and the labor demand curve shifts to the right.

Summary

The labor demand curve shows the value of the marginal product of labor. Starting from there, we can identify a number of factors that cause a shift in the labor demand curve: the output price, technological change, and the supply of other factors of production. An increase in the price of a firm’s output raises the value of each worker’s labor, which shifts the labor demand curve to the right (and vice versa). Meanwhile, technological improvements can increase labor productivity, which also shifts labor demand to the right. Finally, a decrease in the supply of other factors of production shifts the labor demand curve to the left (and vice versa).