What Shifts Labor Demand

A firm hires workers up to the point where the next worker's marginal revenue product, MRP, equals the wage. MRP is marginal product times output price: how many extra units a worker produces, times what each unit sells for. Anything that raises MRP at every wage shifts the whole labor demand curve right; anything that lowers it shifts the curve left. Two channels do this. First, output price: if apps get more valuable, each line of code a coder writes is worth more revenue, so demand for coders rises even though coders write the same amount of code. Second, productivity: better tools, training, or technology let each worker produce more output per hour, raising MRP directly.

This is why a robot can raise demand for some workers and destroy it for others. If the robot is a complement, it makes workers more productive, like a crane making a construction worker able to move more material, MRP rises and demand for that labor shifts right. If the robot is a substitute, it does the worker's job directly, firms swap toward the cheaper robot and away from the worker, shifting labor demand left. The same logic applies to input prices generally: a cheaper substitute input pulls demand for labor left, while a cheaper complement pulls it right, because firms want more of the input it works alongside.

Keep this separate from a change in the wage itself. A higher wage makes firms hire fewer workers at the existing MRP schedule, that is a movement along a fixed labor demand curve, not a shift. This mirrors product markets: price moves you along demand, but income or tastes shift it. Unit 5 builds this MRP logic to later compare it against labor supply and find the market wage.