3.2. Supply of Labour Flashcards
Individual worker’s supply of labour
the number of hours a worker is willing to work at each wage rate
Individual worker’s supply of labour assumptions
1) Workers can choose the number of hours they work.
2) Workers prefer leisure (luxury good) over work (inferior good).
Individual worker’s supply of labour curve (DRAW)
- backwards sloping curve
- supply curve increases then curves back
- y-axis - real wage rate
- x-axis - hours worked
What are the effects when hours worked increases when real wage rate increases
Positive substitution effect > negative income effect (⬆wages → ⬆hrs of work)
What are the effects when hours worked remains the same when real wage rate increases
Positive substitution effect = negative income effect (⬆wages → same hours)
What are the effects when hours worked decreases when real wage rate increases
Positive substitution effect < negative income effect (⬆wages → ⬇hrs of work)
Substitution Effect
- 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).
Income Effect
- 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).
Market supply of labour
shows the total number of workers willing to work at each wage rate.
Causes of shifts in the market supply of labour
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.
Monetary Factors (pecuniary)
salary/wages, bonus, commission, over-time
Non-monetary Factors (non-pecuniary)
annual leave, job satisfaction, health and safety, job security, hours of work, career development, training, prospect of promotion, location of work, length of commute
Net advantages
the overall advantages of working, taking into consideration both the monetary and non-monetary factors.
The long-run supply of labour
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
Size of the population of the country as the long-run supply of labour
an increase in the birth rate or life expectancy will increase the size of the population, which increases the long run supply of labour.
The labour participation rate as the long-run supply of labour
improved attitudes to work or higher wages will increase the participation rate, which increases the long run supply of labour.
The levels of taxation and benefits as the long-run supply of labour
lower taxes and lower benefits create an incentive to work, which increases the long run supply of labour.
The level of net migration as the long-run supply of labour
positive net migration increase the size of the working population, which increases the long run supply of labour.
Elasticity Supply of Labour
a measure of the responsiveness of the quantity of labour supplied to a percentage change in wage rates.
Elasticity Supply of Labour Equation
ESL = %ΔQSL / %ΔW
Elastic supply of labour
%ΔQSL > %ΔW
Inelastic supply of labour
%ΔW > %ΔQSL
Factors affecting the Elasticity Supply of Labour
1) Length of the training period
2) Skills required
3) Type of job
4) Extent of unemployment
5) Time
Length of the training period (Elasticity Supply of Labour)
the more training needed, the more inelastic the supply of labour because it takes longer to gain the qualifications needed in that labour market.
Skills required (Elasticity Supply of Labour)
the more skills that are needed, the more inelastic the supply of labour because there are fewer workers who can do the job
Type of job (Elasticity Supply of Labour)
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.
Extent of unemployment (Elasticity Supply of Labour)
the lower the level of unemployment, the more inelastic the supply of labour as there are fewer spare workers.
Time (Elasticity Supply of Labour)
in the short run, more inelastic the supply of labour because it is difficult to recruit or train workers to start work immediately.
