3.6.2 - Influences on the Supply of Labour to Different Labour Markets

Question 1

What does the market supply curve of labour demonstrate?

Answer 1

How much labour all the workers in the market plan to supply at different wage rates.

Question 2

Draw a market supply of labour curve?

Answer 2

Question 3

What are the two factors that determine the market supply of labour?

Answer 3

Wage Rate
Economic Welfare from other aspects of working

Question 4

What is the common name for economic welfare from other aspects of working?

Answer 4

Job satisfaction (or disatisfaction)

Question 5

What can be said about the relationship between wage rate and job satisfaction if the worker enjoys their work?

Answer 5

The net advantage of work is higher than the welfare yielded by the wage.

(The worker is willing to work for a lower wage if they keep the same level of satisfaction)

Question 6

How do firms compensate for high job disatisfaction?

Answer 6

Higher pay to compensate.

Question 7

How does a worker who is able to decide how many hours a week to work decide how much to work?

Answer 7

They find the point where personal welfare is maximised. The worker supplies labour up to the point at which:
Utility of welfare from the last unit of money earned
=
Utility from the last unit of leisure time sacrificed

This is due to the scarcity of time that arises from only 24 hours in a day.

Question 8

What happens when marginal utility of income earned = marginal utility of leisure time sacrificed?

Answer 8

The worker has maximised their personal welfare.
Provided their personal preferences remain stable, there is no incentive for the worker to supply more labour at the going hourly wage rate.

Question 9

What happens to a worker, who has maximised their personal welfare, when the wage rate is increased?

Answer 9

The higher hourly wage incentivises the worker to work more hours as the welfare derived from the wage is greater than the welfare from the last unit of leisure time.

To maximise their personal welfare at the higher wage rate, a worker will supply more labour with less leisure time.

Question 10

Why do changes in wage cause labour to change against non-monetary advantages?

Answer 10

The change in wage is relatively instant, whereas non-monetary changes occur over time.

Question 11

What can cause the market supply curve of labour to shift?

Answer 11

Benefits / reductions within the job
Changes in income
Changes in population
Changes in expectations

Question 12

Why do benefits / reductions within the job cause the market supply curve of labour to shift?

Answer 12

Benefits within a job will cause people to work more at a constant wage rate, causing higher supplies of labour at the same wage rate.

However, deteriorations of these benefits will cause people to work less and value their leisure time more highly, shifting the curve to the left.

Question 13

Why do changes in income cause the market supply curve of labour to shift?

Answer 13

A reasonable assumption is that leisure time is a normal good for most people, and therefore a rise in income increases the demand for leisure time, which causes the supply curve of labour to shift to the left.

However, for a select few people who often rise to the top of their fields, leisure time is an inferior good, so, for them, higher income reduces their demand for leisure time and they end up supplying more labour.

Question 14

Why do changes in population cause the market supply curve of labour to shift?

Answer 14

A rise in population (possibly due to immigration or high birth rates over the past 18 years) increases the supply of labour.

A reduction in population (brain drain) reduces the supply of labour.

Question 15

Why do changes in expectations cause the market supply curve of labour to shift?

Answer 15

If older people begin living longer, but their pensions look unstable, they will work longer to increase their income and therefore increase the labour supply.

If more younger people feel that higher education is important, the supply of labour will reduce.

Question 16

What country has had problems with over-education?

Answer 16

South Korea.

Question 17

Why is over-education a problem?

Answer 17

Too many people having higher education reduces the amount of people to work in the services industry and other low MRP industries.

Question 18

What is the elasticity of supply of labour?

Answer 18

A proportionate change in the supply of labour following a change in the wage rate.

Question 19

What is the equation for the elasticity of supply of labour?

Answer 19

%∆ qty of labour supplied / %∆ in wage rate

Question 20

What are the factors that can help determine the wage elasticity of labour?

Answer 20

MRP
Occupational / Geographic mobility
Long-run vs. short-run
Unemployment levels

Question 21

Why does MRP determine the wage elasticity of labour?

Answer 21

The supply of unskilled labour is usually more elastic than the supply of a particular type of skilled labour.

Low skilled (low MRP) workers have very short training times. Low MRP workers also do not require any real innate abilities.

Question 22

Why does occupational / geographic mobility determine the wage elasticity of labour?

Answer 22

If a worker is less occupationally / geographically mobile, then the elasticity of labour supply is reduced as there are less available workers to change industries or move areas to work in another field.

Question 23

How does the market curve of labour slope?

Answer 23

Upwards.

Question 24

What does the slope of market curve of labour demonstrate?

Answer 24

Workers plan to supply more labour as the wage rate increases.

Question 25

Why are reductions in population due to migration particularly dangerous for firms that require high MRP individuals?

Answer 25

Often, those who have high MRPs are those who migrate out of the country.

If we lose too many high MRP individuals such as doctors or bankers, they are incredibly difficult to replace and therefore damage an economy more severely than someone who has a low MRP.