3.5.2 Supply of Labour Flashcards
What is the two-factor people have to decide between when working
Opportunity cost of work and leisure
What are the two factors which affect the labour curve
Income effect
Substitution effect
What is the income effect
The rise in income with wage rises…
But with the potential of individuals reaching their target income
This can lead to employees working more or less
What is the substitution effect
as wages rise the opportunity cost of leisure time increases providing an incentive to work
This always leads to individuals working more
Describe how the substitution effect an income effect forms the backwards bending supply of labour curve
Note this is for individuals
Initial rise - Positive substitution effect and positive income effect - high cost of leisure time and people aren’t earning enough
Steeper part/vertical - Substitution effect is still positive but income effect is less positive - people moving close to their target wage
backwards part - Substitution part positive and income effect is negative - people don’t need to work as many hours to achieve required income
The higher the wages are ….
the more negative the income effect is
This is because more people have reached their target income, so don’t have to work as much
describe the supply of labour graph for the whole industry
What assumptions do we make with this graph
Real wage is directly proportional to quantity of workers
We assume that higher wages may see people with skills for this job, rejoin the industry, so increase supply e.g. retired
Describe the graph for the supply of labour for a Perfectly competitive market
Perfectly elastic supply curve because firms in this industry are wage takers
This is because can’t charge too high because their costs will be too high, however they can’t have their wages to low otherwise their workers would leave
Describe the supply of labour graph for a monopsony
Employ labour where Marginal costs = Marginal revenue of product
Meaning they employ too few workers at a too low wage
Example what can cause shifts in the supply of labour curve
- Wage in substitute occupations
- Barriers to entry
- Non-monetary characteristics of jobs - pecuniary benefits
- Improvements in occupational mobility of labour
- Ability to work overtime
- Size of working population
- Value of leisure time
What is Geographical Immobility
refers to barriers people moving from one area to another to find work
Suggest the reasons for Geographical immobility
- Family/social ties (common in older people)
- Financial cost in moving
- Regional differences in house pricing
- High cost of renting
- Regional difference in cost of living
- Cultural/language barriers
- Migration controls
What is occupational immobility of labour
occurs when there are barriers to the mobility of factors of production between different
sectors of the economy leading to these factors remaining unemployed or being used in ways that are not efficient
What are the reasons behind occupational immobility
- Skills gaps: New jobs may require different skills from those that unemployed workers can offer.
- Training gaps: Unemployed workers may not have access to affordable training schemes that would allow
them to improve their human capital and improve employability - Experience gaps: The long term structurally unemployed often have gaps in their CVs that make less them
attractive to employers - Confidence and motivation: The longer someone is unemployed, the harder it is to find fresh work. Skills
decline and so too does confidence and motivation to look for a job - Discrimination: this can be in terms of age, gender, sexual orientation, race/ethnicity etc. Whilst discrimination
is illegal in the UK, it may still be an important cause of occupational immobility.
What are the economic effects of immobility
Structural unemployment
Persistent relative poverty
Loss of potential output
