Labor Economics: Theory, Institutions, and Public Policy

By Ray Marshall; Vernon M. Briggs Jr. | Go to book overview

CHAPTER 7
The Demand for Labor

In the preceding chapter we considered how individuals and families might alter their supply of labor in response to changing economic conditions. Because an important function of the market is to reconcile the amount of labor supplied with the amount of labor demanded, the next logical step in our analysis is to consider the determinants of the demand for labor.

The nature of the demand for labor is also of interest from a policy perspective. Because the government plays such a critical role in determining the state of the economy, it is important to know how the demand for labor will respond to changing economic conditions. Government policy has direct and indirect effects on the labor market. The indirect effects are primarily associated with the use of monetary and fiscal policies. These policies do not explicitly regulate the terms on which labor market transactions take place; rather they are designed to create an economic climate conducive to firms and individuals acting in desirable ways. For example, if production is far below the economy's capacity, the Federal Reserve may make credit more readily available in the hope of stimulating private investment. If, as anticipated, firms want to purchase more capital equipment, this should raise prices and increase output in the capital goods industry, inducing employers in this industry to hire more workers in order to increase their output. The notion of the Keynesian multiplier should be familiar to most readers, and by this reasoning we would expect the initial burst of spending described above to set in motion a chain of additional expenditures that would increase the demand for labor even more.

But by how much more? This is an important question, because presumably one of the government's motives for embarking on an expansionary monetary policy is to increase employment. But to what extent should credit be eased or the money supply increased in order to generate the desired number of additional jobs? Although the answer depends partly on how investment decisions respond to changed monetary conditions, an additional consideration is how the increased demand for production is translated into an increased demand for labor.

The direct effect of government policy on the level and terms of employment is even easier to see. A good example is provided by considering the effects of minimum

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