Question

1. Describe the theory of labor demand and define all assumptions and functions. How does the firm make its employment decision in the long run?

2. Discuss the effects of the wage subsidy for unskilled labor on all factors of production, that is, both types of labor and capital. Consider the model with two types of labor: skilled and unskilled labor.

Answer 1

Labour theory of demand :-

The demand for labor is an economics principle derived from the demand for a firm's output. That is, if demand for a firm's output increases, the firm will demand more labor, thus hiring more staff. And if demand for the firm's output of goods and services decreases, in turn, it will require less labor and its demand for labor will fall, and less staff will be retained.

Demand for labor is a concept that describes the amount of demand for labor that an economy or firm is willing to employ at a given point in time.

The demand for labour is a derived demand. It is derived from demand for the commodities it helps to produce. The greater the consumers’ demand for the product, the greater the producers’ demand for the labour required in making it. Hence an expected increase in the demand for a commodity will increase the demand for the type of labour that produces this commodity.

Assumptions of Labor Demand Analysis
1. Demand for labor is a short run demand, i.e, the demand for labor, all other resources constant.
2. Demand is the demand for labor by one firm
3. The firm sells output in a perfectly competitive market.
4. The labor market is perfectly competitive.

2) Wage subsidies are a financial incentive to encourage employers to hire eligible participants in ongoing jobs by contributing to the initial costs of hiring a new employee. Wage subsidies can help to build a business and give employers greater flexibility in their hiring options.

Wage subsidies are solution to unemployment problem especially to unskilled workers.

Subsidy will increase working hours of both skilled and unskilled workers.