3.5.2 - Labour supply

Question 1

What is the income effect

Answer 1

the rise in income as wages rise but with the potential of individuals reaching a target income (can be positive or negative)
- so this effect encourages the worker to demand more leisure as target income is reached

Question 2

What is the substitution effect

Answer 2

as wages rise, the opportunity costs if leisure time increases providing an incentive to work, substituting more leisure time for work (always positive

Question 3

What is individual labour supply

Answer 3

total number of hours that a person is willing to supply at a given wage rate

Question 4

Why is the individual labour supply backward bending (real wage by hours worked)

Answer 4

1) at low wages which are increasing, the substitution effect is positive and so is the income effect bc at low wages, they have to work to collect higher income to meet basic needs. so overall wage effect is positive meaning higher wages means more hours worked
2) real wages rise even more and so does opportunity cost of leisure time meaning substitution effect is stronger and positive. But income effect is becomeing negative (not enough to outweigh sub effect), shown by a slow down in rate of increase in hours worked. Wage effect is still positive
3) curve bends back on itself and sub effect is still positive but income effect becomes stronger and negative bc we assume people have recahed target income now so they stop sacrificing leisure time for work as they are satisfied. so overall wage effect is negative

Question 5

Diff between short term and long term individual labour supply

Answer 5

SR: Choice between work and leisure
LR: pecuniary and non-pecuniary benefits, job satisfaction

Question 6

Examples of non-pecuniary (non-monetary) benefits

Answer 6

flexible working hours, employee discount, job security, company car, generous holiday allowance, pension schemes, job security

Question 7

Effect of non-pecuniary benefits

Answer 7

firms can shift their labour supply curve as workers prepared to supply more hours of work at any given wage rate, so firms benefit from loyalty

Question 8

What is the industry supply curve

Answer 8

• upward sloping
• we assume that as wages increase, there is a constant increase in workers as more people will tend to offer themselves for work if wage is high
• wages act as a signal to workers about which industries are offering the best returns

Question 9

Reasons for shift in industry labour supply curve

Answer 9

1) wage on offer in substitude occupations
2) barriers to entry: qualifications, skills, training lengths; doctors and engineers have very higher b to entry
3) non-pecuniary benefits
4) improvements in occupational mobility
5) size of working population (this determines participation rate)
6) value of leisure time
7) overtime - if overtime is available, more people will work in that job as this financial boost is highly valuable
8) changes in migration policy
9) trade union power

Question 10

Define pecuniary benefits

Answer 10

The notion that labour supply is affected by the wage rate and other monetary advantages, such as, perhaps, the ability to buy shares, or the existence of bonuses. Also known as monetary factors.

Question 11

define non-pecuniary benefits

Answer 11

The notion that labour is supply is affected by factors other than wages or money, for example, working conditions, the amount of leisure time, the facilities available at work, the sociability of the hours etc. Also known as non-monetary factors.

Question 12

Define geographical immobility

Answer 12

Geographical immobility refers to barriers people moving from one area to another to find work. So people end up in jobs not suited to them or unemployed

Question 13

Define occupational immobility

Answer 13

Occupational immobility occurs when there are barriers facing people active in the labour market in moving from one job to another e.g lack of transferable skills due to lack of training.

Question 14

Why does geographical immobillity occur

Answer 14

• people have family and friends they may not want to leave behind
• expensive to move house, cost to buy and sell a house
• moving means people are on the bottom of the waiting list for council house
• regional diff in cost of living means its unaffordable/ cannot afford house prices/ rent elsewhere
• lack of infor about job availability in other areas

Question 15

Why does occupational immobility occur

Answer 15

• firms underprovide training to workers due to free rider problem - they employe workers already trained by rival firms without contributing to the costs, thus causing structural unemployment
• lack of info; people do not recognsie their aptitude for a diff job/cannot see the job satisfaction possible from a new jobs. applies to both employed and unemployed
• ## older people less likely to retrain than youngers

Question 16

Examples of geographical immobility and how it can be solved

Answer 16

• In London average rents are now over 50 percent of median disposable incomes.
• solve by: housing reforms involving a combination of scaling back planning regulations, new taxes on the capital value of land owned by investors who have gained planning permission and also a higher stamp duty on second homes. The aim would be to achieve a rise in new housing starts andcompletions.

Question 17

Why are hosuing reforms not enough to solve hosuing costs

Answer 17

effectiveness of the policy for example depends on what type of new housing is built – e.g. is it targeted at younger people? What percentage of new homes meets the price range for it to be affordable? Will housing developers instead focusonproperties that gentrify an area without tackling the root causes of housing need for families on below median incomes?

• Building more homes does not address the problems causes by the large number of second and empty homes which is allocatively inefficient.

Question 18

How to resolve occupational immobility?

Answer 18

The Apprenticeship Levy is a government intervention designed to increase funding and take-up of vocational training. The levy requires businesses with an annual wage bill of £3 million or more to pay0. 5% if their payroll costs into an apprenticeship fund that they can then access to pay for training.
- This compulsion can help overcome the free-rider problem when firms who have invested in the human capital of their workforce find valuable employees “pinched” by rival firms who get the benefit without contributing to the cost.

Question 19

Evaluate the apprenticeship scheme

Answer 19

• scheme is at risk of government failure.
• in 2018, apprenticeship-levy paying firms only accessed £200m of an available £2 billion in levy funds and the number of new apprenticeships has actually declined in recent years.
• Some firms complain that the quality of training on offer from training providers is sub-prime.
• Employees themselves may feel that vocational qualifications remain under-valued in the labour market although the more rigorous T-level qualifications may help to address going forward.

Question 20

Evidence of occupational immobility

Answer 20

The UK suffers from a severe skills shortage and this could cost £90bn a year following
Brexit. There are four million too few high skilled people but six million too many low skilled people. Engineering is one industry suffering particularly badly from skills shortages.

Question 21

Other policies to tackle labour immobility

Answer 21

● They could improve transport links which will allow people to work further away
from where they live and if they do move, it will be easier for them to visit family and
get to job interviews.
● National advertising could be used so people know about jobs all over the country.
● The government could introduce subsidies on houses, taxes etc. in areas where there are labour shortages to encourage people to move to the area and take up jobs.
- education reforms
- liberalisation of immigration laws
- Improvement in broadband provision so they can access jobs online
- e.g. relocation subsidies- workers might be given help with house removal costs/accommodation available to immediately move into- could do a d and s subsidy diagramTravel discounts for unemployed people

Question 22

examples of educational reforms?

Answer 22

• T levels: vocational qualification that were introduced in 2020, provide students with the knowledge and skills needed to succeed in a particular career, and are equivalent to three A-Levels in terms of their level of difficulty
• the Advanced British Standard meams Students will have the freedom to take a mix of technical and academic subjects, giving them more flexibility to support their future career options, study a minimum of five subjects with compulsory maths and english till 18

Question 23

Evaluate relocation subsidies

Answer 23

a large magnitude of relocation subsidies/training required, significance for economy- the financial costs of this for the government- significant funding through maybe rise in taxes.
- time period required to retrain labour, especially highly specialised skills, older workers may find it harder to pick up new skills

Question 24

Cons of HS2

Answer 24

CONS
- Environmental negative externality, pressure group Stop HS2
- Government admitted it will cost taxpayers more than the benefits it will deliver- it will now deliver just 90 pence in economic benefit for every £1 it costs.
Intended to cost £38 billion, but is now expected to exceed £100 billion by the time it is complete
- 43% of the economic benefits of HS2 will be felt by those living London and the South East, despite ministers’ claims it would be a major component of the Government’s ‘levelling up’ project
- Estimated cost of HS2 could lead to contractionary fiscal policy needed in the future, future generations. so leeds leg scrapped
- leeds eastern leg and northern manny leg scrapped - how does this resolve geographical immobility

Question 25

pros of hs2

Answer 25

• zero carbon journey
• sinks cancelled northern leg but He promised £9.6bn would be reinvested in the Midlands, including the Midlands rail hub project, and an extra £1bn in funding for the West Midlands city region,
  -The cost of HS2 will be spread out over 15-20 years. Therefore we can afford it.
• taken so long from 2017 to 2033