labour demand curve is a graph, indicating in a wage/employment
diagram how much work (measured in work hours) firms demand at different
wage rates. The curve is negatively sloping, meaning that firms
want to cut down on employment if work becomes more expensive.
The labour demand curve is derived from the partial production
function (K fixed). Microeconomics teaches that utility-maximizing
individuals buy another shirt if the utility derived from the shirt
exceeds its price. In the same vein, a firm that maximizes profits
hires another hour of work if the value of what will be produced
during this hour exceeds the cost.
We know that the slope of the partial production function
(K fixed) measures the marginal product of labour (MPL), that is
the output gained by employing one more hour of labour. The partial
production function is steep when little labour is employed, it
becomes successively flatter as firms employ more labour. Therefore,
the MPL is high at low values of L and low at high values of L.
Thus the MPL may be represented in a diagram with a marginal product
of labour on the vertical axis and work hour on the horizontal axis
as a line that falls from left to right.
In a final step we need to show that this downwards sloping
MPL curve is also the labour demand curve. Recall that the marginal
product of labour indicates the value of one more work hour to the
firm. If the hourly wage is, say, w1 the MPL remains
above this cost as long as less than L1 work hours are
being employed. If employment exceeds L1, additional
work costs more than the revenue it generates for the firm. Hence
the profit-maximizing firm demands employment up to L1,
but not beyond.
The same argument applies at other wage rates. Going to the
right from a selected wage rate, the MPL curve always indicates
how much labour firms may profitably employ. Hence the marginal
product of labour curve is also the labour demand curve.
View animated illustration
Further reading on pp. 140-143.