Two Factors that Affect Labor Supply and Demand

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In every business that deals with a collection of employees, labor supply and demand must be a consideration by management or ownership. No business that requires additional employees can reach their potential without them; striking a balance between the labor available and the labor needed is always a concern that relates to productivity and to profits. Understanding the main factors that can sway labor supply and demand can help you to run a successful business.

Labor Demand Defined

  • Before learning the factors that affect labor demand, you must first know exactly what is meant by the term. Simply put, labor demand is the amount of workers needed to get the job done. Labor demand is a decision by management or ownership concerning how many employees or labor hours to use to complete a necessary task. Usually, the decision is heavily influenced by money. It is in the company's best interests to use as little labor as necessary to save money while still accomplishing the workload that is required.

Labor Supply Defined

  • On the opposite side of this carefully balanced scale is labor supply. Labor supply is simply the amount of workers available to a business at a given time. During times when labor supply is low, it can be tougher to retain employees because of other opportunities and fewer out-of-work people.

Wage Factor

  • The wage factor is the most significant issue affecting labor supply and demand. People do not typically work for fun. They work for money and the amount they get paid is a central factor in deciding whether they will take a job or stay at a job when something else is available. Higher wages increase the labor supply for a company because it makes the job more attractive to more people. Lower wages, however, may increase the labor demand because companies can afford to hire more people at a lower rate than at a higher rate. This results in a constant tug of war in the delicate balance between supply and demand.

Barriers to Entry

  • Barriers to entry are a second factor that affects labor supply and demand. Demand from hiring companies may go up because the employees they seek are specialized in some particular skill or have many requirements of new hires. Meanwhile, the labor supply decreases significantly because of these barriers. If a company only considers master's degree holders for a position, the supply of candidates for the job drops significantly compared to a company seeking candidates with a bachelor's degree. In addition, companies that require complicated testing or that require new hires to "jump through hoops" to get through the interview process usually find that their labor supply drops off significantly because of other options in the market that are easier to nail down.

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