3.5.2 - Supply for labour Flashcards
What effects will an increase in the wage rate paid to workers have ?
- On the one hand, it will tend to attract more workers into that industry, thereby increasing labour supply.
- However, the change may also affect the supply decisions of workers already in that industry, and for existing workers an increase in the wage rate may have ambiguous effects.
In other words what can the wage rate be said to be ?
The opportunity cost of leisure
It is the income that the worker has to sacrifice in order to enjoy leisure time.
What does an increase in wage rate do to the opportunity cost of leisure ?
It increases the opportunity cost of leisure
What effects does an increased opportunity cost of leisure have ?
There will be a substitution effect against leisure. In other words, workers will be motivated to work longer hours.
- However, as the higher wage brings the worker a higher level of real income, a second effect comes into play, encouraging the consumption of more goods and services
What is the problem with the effects that an increased opportunity cost of leisure has ?
The two effects work against each other.
The substitution effect encourages workers to offer more labour at a higher wage because of the effect of the change in the opportunity cost of leisure.
However, the real income effect encourages the worker to demand more leisure as a result of the increase in income
What happens to the income effect as wages rise ?
The income effect may gradually become stronger
So at some wage level the worker will choose to supply less labour and will demand more leisure.
What is the shape of the individual labour supply curve ?
It is backwards bending
like this )
What can effect the decisions about labour supply ?
Job satisfaction
A worker who finds his or her work to be satisfying may be prepared to accept a lower wage than a worker who really hates every minute spent at work.
What are non-pecuniary benefits ?
They are benefits that are not reflected in the wages
AKA fringe benefits
What can firms providing non-pecuniary benefits lead to ?
Firms may effectively shift the position of their labour supply curves, as workers will be prepared to supply more labour at any given wage rate.
It may also be seen as a way in which firms can encourage loyalty, and thus hold on to workers when the job market is tight.
What is the labour supply curve for a market like ?
It is upward sloping
Why is the labour supply curve for a market upward sloping ?
This is because more people will tend to offer themselves for work when the wages are higher
What are the factors that may influence the position of the labour supply curve ?
Size of the working age population
Wages on offer in substitute occupations
Barriers to Entry
Non-pecuniary Benefits
Overtime
How can the size of the working age population affect the position of the labour supply curve ?
The larger the size of the working age population, and the higher the participation rate, the greater any industry labour supply curve will be.
How can the wages on offer in substitute occupations affect the position of the labour supply curve ?
Changes in relative wage rates between occupations would likely cause some workers to switch occupation.
If wages on offer in substitute occupations are rising at a relatively higher rate, the industry supply curve is likely to shift to the left i.e. decrease.
