Which of the following changes would lead to a direct increase in labor demand?
A. Higher legal retirement age
B. Higher minimum wages
C. An increase in demand in the product market
D. Completion of new factories
The correct answer and explanation is:
The correct answer is C. An increase in demand in the product market.
Labor demand is derived from the demand for goods and services. When the demand for products increases, businesses need more labor to produce those goods, resulting in a direct increase in labor demand. If consumer demand for a product rises, firms will increase production to meet that demand. This, in turn, requires hiring more workers or increasing working hours for existing employees, directly impacting the labor demand curve.
In detail, labor demand is highly elastic to changes in product market demand because businesses respond to market conditions. For instance, if a popular product sees a rise in demand due to consumer trends or economic growth, companies may invest in increasing production capacity. This process often leads to hiring more workers, requiring the businesses to adjust their workforce needs. The higher the demand for the product, the higher the need for labor to meet that demand.
Let’s look at the other options for clarity:
- A. Higher legal retirement age: This might increase the supply of labor by keeping older workers in the workforce for longer, but it doesn’t directly increase labor demand.
- B. Higher minimum wages: While this affects the cost of hiring labor, it does not directly increase the demand for labor. In fact, higher wages could lead to a reduction in labor demand if businesses find the cost of labor too high, especially in industries with tight profit margins.
- D. Completion of new factories: While new factories can increase the need for labor, this is an indirect change. The demand for labor would be driven by the level of production required in those factories, which again depends on product market demand.
Thus, an increase in demand for products directly triggers an increase in labor demand to meet that demand.