David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

10.3 The industry demand curve for labour
The industry demand curve for labour
For a given price P0 and wage W0, each firm in a competitive industry chooses employment to equate the
wage and the MVPL. Figure 10.3 horizontally adds the marginal value product of labour curves for each
firm to obtain the MVPL0 schedule for the industry. At the wage W0 and the price P0, the industry is at E0.
This is a point on the industry demand curve for labour.
However, MVPL0 is not the industry demand curve for labour. It is drawn for a particular output price P0•
Suppose the wage is cut from W0 to W1. At the output price P0, each firm wants to move down its MVPL
schedule and the industry expand output and employ labour to point E1 in Figure 10.3. In terms of the
supply and demand for output, the cut in wages has shifted the industry supply curve to the right.
At the given price P0, there is now an excess supply of goods. This bids down the price for the industry's
product to a lower price P1. The lower price shifts each firm's MVPL schedule to the left. MVPL1 is thus the
new MVPL schedule for the industry at the new price P1• The industry chooses the point E at the new
wage wl.
Connecting points such as E0 and E, we get the industry demand for labour schedule DLDL in Figure 10.3.
Each firm constructs its MVPL schedule as if it were a price-taker but the industry demand curve has a
steeper slope, since a lower wage shifts the industry output supply curve to the right and reduces the
equilibrium price.
The slope of the MVPL schedule reflects the production technology. The more MPL diminishes as labour
input rises, the steeper is the MVPL schedule of the firm and of the industry. The slope of the industry
demand curve for labour also depends on the elasticity of the market demand curve for the industry's
product. The more inelastic output demand is, the more a wage cut - by raising the supply of output - bids
down the output price and shifts MVPL schedules to the left, and the steeper is the industry demand curve
DiDi for labour.
The demand for factors of production is a derived demand. Firms want factors only because they see a
demand for their output that it is profitable to supply. The elasticity of input demand reflects the elasticity
of output demand.
Employment
MVPL0 is the horizontal sum of each firm's
MVPL schedule at the price P 0. Each firm
and the industry as a whole sets MVPL
equal to W0. Hence E0 is a point on the
industry demand curve for labour. A lower
wage W1 leads each firm and the industry
as a whole to move down their MVPL
schedules to a point f1 • Extra employment
and output by the whole industry (a shift to
the right in the industry supply curve of
goods) leads to excess goods supply at the
original price P0• To clear the output market
the price must fall, and this shifts to the left
each firm's MVPL schedule. The new industry
schedule is MVPL1 and the chosen point is f.
Joining all the points such as E0 and E, we
obtain the industry demand curve DLDL.
Figure 10.3
The industry demand for labour
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