Question

Explain using graph and words why the market labor demand curve isn't simply the horizontal summation of the firm's labor demand curves. Why is the market labor demand curve less elastic?

Answer 1

Demand for labor is a derived demand. Firms demand for labour is due to its decision to produce certain goods and services. Hence if demand for goods and services is higher then demand is generated and time is taken for more jobs to be generated. Demand for labor is also skill based. It is difficult to get desired skilled labor. Skilled labor have high labor attrition rates. Training costs are higher and companies always try to reduce training costs.

Frictional unemployment exists as job seekers may not be clear about job openings. This makes demand more inelastic. It is also a fact that as labor wages go up supply will go up till point X, but after this point supply will decrease as people will prefer leisure more due to increased incomes.

Answer 2

The market labor demand curve represents the overall demand for labor from all firms in a particular labor market at various wage levels. It is not simply the horizontal summation of the individual firm's labor demand curves because the demand for labor is influenced by several factors that affect all firms in the market collectively.

To illustrate this concept, let's consider a simple example with two firms, Firm A and Firm B, operating in the same labor market. Each firm has its own labor demand curve, indicating the quantity of labor it is willing to hire at different wage levels.

Graphically, Firm A's labor demand curve might look like this:

sqlCopy code            ^
            |Wage (W)   |
            |
   $10 -----|---- FIRM A's Labor Demand
            |
            |

Similarly, Firm B's labor demand curve might look like this:

sqlCopy code            ^
            |Wage (W)   |
            |
   $10 -----|---- FIRM B's Labor Demand
            |
            |

Now, let's examine the market labor demand curve by horizontally adding the quantity of labor demanded by each firm at the same wage level:

sqlCopy code            ^
            |Wage (W)   |
            |
   $10 -----|---- FIRM A's Labor Demand
            |
            |
   $10 -----|---- FIRM B's Labor Demand
            |
            |
   $10 -----|---- MARKET Labor Demand
            |
            |

As we can see, the market labor demand curve is not simply the horizontal summation of Firm A's and Firm B's labor demand curves. Instead, it is the sum of the quantities of labor demanded by all firms in the market at each wage level.

The market labor demand curve is less elastic compared to individual firm labor demand curves because it reflects the collective behavior of all firms in the market. In other words, the market demand for labor takes into account the overall demand and supply conditions in the entire labor market, including the total number of firms, the availability of alternative inputs, and other macroeconomic factors.

As a result, the market labor demand curve is influenced by a broader range of factors, making it less responsive to changes in wage levels compared to individual firm labor demand curves, which are affected by specific factors unique to each firm.

Answer 3

To understand why the market labor demand curve isn't simply the horizontal summation of the firm's labor demand curves, we need to look at the relationship between the wage rate and the quantity of labor demanded in both cases. Let's consider a hypothetical example with two firms, Firm A and Firm B, each having its own labor demand curve, and then examine the market labor demand curve.

Graphically, we represent the quantity of labor on the horizontal axis (L) and the wage rate on the vertical axis (W).

1. Firm A's Labor Demand Curve (LA): Let's assume Firm A's labor demand curve is downward sloping, indicating that as the wage rate decreases, Firm A is willing to hire more workers. This negative relationship between wage and quantity of labor demanded is common in real-world scenarios.

   

2. Firm B's Labor Demand Curve (LB): Similarly, let's assume Firm B's labor demand curve is also downward sloping, meaning that as the wage rate decreases, Firm B hires more workers.

   

Now, let's see why the market labor demand curve is not the horizontal summation of these individual firm curves:

3. Market Labor Demand Curve (LMarket): When we combine Firm A and Firm B's labor demand curves, we get the market labor demand curve (LMarket). It represents the total quantity of labor demanded in the entire market at different wage rates.

   

Why is the market labor demand curve less elastic?

The market labor demand curve is less elastic compared to individual firm labor demand curves because it reflects the aggregated behavior of all firms in the market. The key reasons for its lower elasticity are:

1. Substitution Effect: In the market, when the wage rate decreases, it encourages all firms to hire more workers. As a result, individual firms may compete to attract workers, which increases the overall demand for labor. This means that the responsiveness of the market labor demand curve to changes in the wage rate is higher than that of a single firm's demand curve.

2. Scale of Operations: The combined demand for labor in the entire market represents a larger scale of operations compared to an individual firm. As more firms participate in the market, the overall demand for labor becomes less sensitive to changes in the wage rate, leading to a less elastic market labor demand curve.

3. Industry Demand: In many cases, firms within an industry face similar market conditions, such as market demand for their products/services, technological advancements, and macroeconomic factors. This similarity in demand conditions further contributes to the convergence of individual firm labor demand curves, making the market labor demand curve less elastic.

In summary, the market labor demand curve is not the horizontal summation of the firm's labor demand curves because it reflects the combined behavior of all firms in the market, taking into account factors like substitution effects, the scale of operations, and industry demand. As a result, the market labor demand curve is less elastic compared to the individual firm's labor demand curve.