Editing Labour economics (section)

===Neoclassical demand===
{{See also|Labour demand}}

A firm's labour demand is based on its [[marginal product of labour|marginal physical product of labour]] (MPP<sub>L</sub>). This is defined as the additional output (or physical product) that results from an increase of one unit of labour (or from an infinitesimal increase in labour). (See also [[Production theory basics]].)

Labour demand is a derived demand; that is, hiring labour is not desired for its own sake but rather because it aids in producing output, which contributes to an employer's revenue and hence profits. The demand for an additional amount of labour depends on the [[Marginal Revenue Product]] (MRP) and the [[marginal cost]] (MC) of the worker. With a [[perfect competition|perfectly competitive]] goods market, the MRP is calculated by multiplying the [[price]] of the end product or service by the [[Marginal Physical Product]] of the worker. If the MRP is greater than a firm's Marginal Cost, then the firm will employ the worker since doing so will increase [[profit (economics)|profit]]. The firm only employs however up to the point where MRP=MC, and not beyond, in neoclassical economic theory.<ref name="robertfrank"/>

The MRP of the worker is affected by other inputs to production with which the worker can work (e.g. machinery), often aggregated under the term "[[capital (economics)|capital]]". It is typical in economic models for greater availability of capital for a firm to increase the MRP of the worker, all else equal. [[Education]] and training are counted as "[[human capital]]". Since the amount of physical capital affects MRP, and since financial capital flows can affect the amount of physical capital available, MRP and thus [[wages]] can be affected by financial capital flows within and between countries, and the degree of capital mobility within and between countries.<ref>{{cite journal |last=Hacker |first=R. Scott |year=2000 |title=The Impact of International Capital Mobility on the Volatility of Labour Income |journal=Annals of Regional Science |volume=34 |issue=2 |pages=157–172 |doi=10.1007/s001689900005 |bibcode=2000ARegS..34..157H |s2cid=154020468 }}</ref>

According to neoclassical theory, over the relevant range of outputs, the marginal physical product of labour is declining (law of diminishing returns). That is, as more and more units of labour are employed, their additional output begins to decline.

Additionally, although the MRP is a good way of expressing an employer's demand, other factors such as social group formation can the demand, as well as the labour supply. This constantly restructures exactly what a labour market is, and leads way to cause problems for theories of inflation.<ref name="tarling"/>