3.2. Supply of Labour

Question 1

Individual worker’s supply of labour

Answer 1

the number of hours a worker is willing to work at each wage rate

Question 2

Individual worker’s supply of labour assumptions

Answer 2

1) Workers can choose the number of hours they work.

2) Workers prefer leisure (luxury good) over work (inferior good).

Question 3

Individual worker’s supply of labour curve (DRAW)

Answer 3

• backwards sloping curve
• supply curve increases then curves back
• y-axis - real wage rate
• x-axis - hours worked

Question 4

What are the effects when hours worked increases when real wage rate increases

Answer 4

Positive substitution effect > negative income effect (⬆wages → ⬆hrs of work)

Question 5

What are the effects when hours worked remains the same when real wage rate increases

Answer 5

Positive substitution effect = negative income effect (⬆wages → same hours)

Question 6

What are the effects when hours worked decreases when real wage rate increases

Answer 6

Positive substitution effect < negative income effect (⬆wages → ⬇hrs of work)

Question 7

Substitution Effect

Answer 7

• as real wages rise, the reward to working increases.
• Therefore, the opportunity cost of not working (leisure) increases (i.e. higher wages are given up).
• Therefore when wages rise, workers will substitute work for leisure and work more hours (positive relationship: higher wages = more work).

Question 8

Income Effect

Answer 8

• work is an inferior good and leisure is a luxury good.
• As incomes rise, workers demand more luxury goods (leisure) and fewer inferior goods (work). (negative relationship: higher wages = less work).

Question 9

Market supply of labour

Answer 9

shows the total number of workers willing to work at each wage rate.

Question 10

Causes of shifts in the market supply of labour

Answer 10

1) Change in the non-monetary factors in that labour market
e.g. increase in job satisfaction → increase in supply of labour → shift outwards.
2) Change in the wage rates and non-monetary factors in other labour markets
decrease in wages or job satisfaction in other labour market → increase in supply of labour in this labour market → shift outwards.
3) Change in the size of the labour force of the whole economy: increase in retirement age or immigration → increase in supply of labour → shift outwards.

Question 11

Monetary Factors (pecuniary)

Answer 11

salary/wages, bonus, commission, over-time

Question 12

Non-monetary Factors (non-pecuniary)

Answer 12

annual leave, job satisfaction, health and safety, job security, hours of work, career development, training, prospect of promotion, location of work, length of commute

Question 13

Net advantages

Answer 13

the overall advantages of working, taking into consideration both the monetary and non-monetary factors.

Question 14

The long-run supply of labour

Answer 14

1) Size of the population of the country
2) The labour participation rate
3) The levels of taxation and benefits
4) The level of net migration

Question 15

Size of the population of the country as the long-run supply of labour

Answer 15

an increase in the birth rate or life expectancy will increase the size of the population, which increases the long run supply of labour.

Question 16

The labour participation rate as the long-run supply of labour

Answer 16

improved attitudes to work or higher wages will increase the participation rate, which increases the long run supply of labour.

Question 17

The levels of taxation and benefits as the long-run supply of labour

Answer 17

lower taxes and lower benefits create an incentive to work, which increases the long run supply of labour.

Question 18

The level of net migration as the long-run supply of labour

Answer 18

positive net migration increase the size of the working population, which increases the long run supply of labour.

Question 19

Elasticity Supply of Labour

Answer 19

a measure of the responsiveness of the quantity of labour supplied to a percentage change in wage rates.

Question 20

Elasticity Supply of Labour Equation

Answer 20

ESL = %ΔQSL / %ΔW

Question 21

Elastic supply of labour

Answer 21

%ΔQSL > %ΔW

Question 22

Inelastic supply of labour

Answer 22

%ΔW > %ΔQSL

Question 23

Factors affecting the Elasticity Supply of Labour

Answer 23

1) Length of the training period
2) Skills required
3) Type of job
4) Extent of unemployment
5) Time

Question 24

Length of the training period (Elasticity Supply of Labour)

Answer 24

the more training needed, the more inelastic the supply of labour because it takes longer to gain the qualifications needed in that labour market.

Question 25

Skills required (Elasticity Supply of Labour)

Answer 25

the more skills that are needed, the more inelastic the supply of labour because there are fewer workers who can do the job

Question 26

Type of job (Elasticity Supply of Labour)

Answer 26

the more difficult or dangerous or stressful the job, the more inelastic the supply of labour because fewer workers are willing to do the job.

Question 27

Extent of unemployment (Elasticity Supply of Labour)

Answer 27

the lower the level of unemployment, the more inelastic the supply of labour as there are fewer spare workers.

Question 28

Time (Elasticity Supply of Labour)

Answer 28

in the short run, more inelastic the supply of labour because it is difficult to recruit or train workers to start work immediately.