Chapter 17 - The supply of labour Flashcards
Why is the labour supply curve unlikely to be flat for an industry?
Intuitively, you might expect to see an upward-sloping labour supply curve. The reason for this is that more people tend to offer themselves for work when the wage is relatively high. Notice that there are different ways of looking at a labour market such as this. We can define an ‘industry’ in the conventional way as a particular sector, such as banking or the car industry. However, this is clearly a simplification, because banking employs a range of individual workers with different skills, as does the car industry. It may therefore be more helpful to think of the market in terms of the supply of labour to an occupation, such as accountancy, remembering that accountants may be employed in a wide range of different economic activities. One reason that this is more helpful is that it makes more sense to consider a single wage for accountants than to imagine that all workers in the car industry receive the same wage.
What is the effect of the wage rate on labour supply?
Consider an individual worker who is deciding how many hours of labour to supply. Every choice comes with an opportunity cost, so if a worker chooses to take more leisure time, he or she is choosing to forgo income-earning opportunities. In other words, the wage rate can be seen as the opportunity cost of leisure. It is the income that the worker has to sacrifice in order to enjoy leisure time.
Now think about the likely effects of an increase in the wage rate.
Such an increase raises the opportunity cost of leisure. This in turn has two effects. First, as leisure time is now more costly, so workers will tend to work longer hours and take less leisure. In other words, there is a substitution effect, as workers substitute work for leisure.
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 — including leisure, if it is assumed that leisure is a normal good. This is an income effect.
Notice that these 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 income effect encourages the worker to demand more leisure as a result of the increase in income. The net effect could go either way.
How does individual labour supply work?
It might be argued that at relatively low wages the substitution effect will tend to be the stronger.
However, as the wage continues to rise, the income effect may gradually become stronger, so that at some wage level the worker will choose to supply less labour and will demand more leisure. The individual labour supply curve will then be backward bending, where an increase in the wage rate above W* induces the individual to supply fewer hours of work in order to enjoy more leisure time.
What are the factors influencing the position of the labour supply curve?
- The wage prevailing in other industries or occupations
- The skills needed for the job and the cost and difficulty of acquiring those skills
- The number of people with the appropriate qualifications
- The non-pecuniary benefits offered by firms in the industry
- The demographic structure of the population and the availability of immigrant workers
How does skills and qualifications influence the position of the labour supply curve?
Different industries or occupations require different skills, so the position of the supply curve will depend upon the number of individuals who have the necessary skills — and upon the cost and difficulty of acquiring those skills. Vets command high salaries, but the cost of gaining the qualifications needed to become a vet is also high, therefore limiting the number of people eligible for jobs
What are non-pecuniary benefits?
Benefits offered to workers by firms that are not financial in nature
How does non-pecuniary benefits influence the position of the labour supply curve?
Decisions about labour supply may also be influenced by 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. Indeed, firms may provide other non-pecuniary benefits — in other words, firms may provide benefits that are not fully reflected in wages. These are sometimes known as fringe benefits.
Such benefits might include a subsidised canteen or other social facilities. They could also include in-work training, pension schemes or job security. If this is the case, then in choosing one job over another, workers may not only consider the wage rate, but the overall package offered by employers. In other words, firms may be able to shift the position of their labour supply curves, as workers will be prepared to supply more labour at any given wage rate.
How does demographic factors benefits influence the position of the labour supply curve?
In the long term, the number of people in the workforce influences the supply of labour. Although this may not affect the supply curve of labour in the short run, an influx of migrant labour can do so. For example, if there is an increase in the number of migrant workers with a particular skill set, this will shift the labour supply to the right.
What are the factors that influence the wage elasticity of supply?
- Availability of workers
- Skills
- Qualifications
- Labour immobility
- Long-run elasticity
How does availability of workers affect wage elasticity of supply?
Labour supply may depend upon the availability of workers. For example, if there is unemployment, there will be workers ready to take up jobs. In this case labour supply will tend to be elastic. However, if the job market is tight, supply will be relatively more inelastic.
How does skills and qualifications affect wage elasticity of supply?
If the workers available for work do not have the skills needed for the vacancies available, training will be needed. In this instance, labour supply is likely to be relatively inelastic.
In some occupations and professions, such as accountancy or nursing, specific qualifications are required, which will make labour supply relatively more inelastic. This effect will be reinforced where the profession is seen as a vocation. For example, nurses may be less sensitive to changes in the wage rate if they are committed to their jobs.
How does labour immobility affect the wage elasticity of supply?
If the workers who are available for work are located in areas remote from where the vacancies are appearing, this can cause problems. For example, if the available workers are living in Newcastle, but the vacancies are in London, then they may not respond to the higher wages on offer, given the costs of transport, moving house, finding new schools for their children — or even being able to find out that the jobs are available.
Labour supply may therefore be relatively inelastic in the short run.
How does long-run elasticity affect the wage elasticity of supply?
In the long run, labour supply may be more elastic. More people may be attracted into high-paid occupations, industries or regions, even if some retraining or relocation is needed. Alternatively, firms may shift their locations to where labour is more plentiful.
What are transfer earnings?
The minimum payment required to keep a factor of production in its present use
What is economic rent?
A payment received by a factor of production over and above what would be needed to keep it in its present use.
What are some examples of differences in elasticity of supply?
First think about the surgeons. Surgeons are in relatively inelastic supply, at least in the short run. The education required to become a surgeon is long and demanding, and is certainly essential for entry into the occupation. Furthermore, not everyone is cut out to become a surgeon, as this is a field that requires certain innate abilities and talents. This implies that the supply of surgeons is limited and does not vary a great deal with the wage rate. If this is the case, then the earnings of surgeons are largely made up of economic rent.
The situation may be reinforced by the fact that once an individual has trained as a surgeon, there may be few alternative occupations to which, if disgruntled, he or she could transfer. There is a natural limit to how many surgeons there are, and to their willingness to exit from the market.
How about butchers? The training programme for butchers is less arduous than for surgeons, and a wider range of people is suitable for employment in this occupation. Labour supply for butchers is therefore likely to be more elastic than for surgeons, and so economic rent will be relatively less important than in the previous case. If butchers were to receive high enough wages, more people would be attracted to the trade and wage rates would eventually fall.
In addition, there are other occupations into which butchers can transfer when they have had enough of cutting up all that meat: they might look to other sections of the catering sector, for example. This reinforces the relatively high elasticity of supply.
Why is the demand for labour important?
Indeed, it is the position of the demand curve when interacting with supply that determines the equilibrium wage rate in a labour market. It may well be that the supply of workers skilled in underwater basket weaving is strictly limited, but if there is no demand for underwater basket weavers then there is no scope for that skill to earn high economic rents. In the above example, it is the relatively strong demand for surgeons relative to their limited supply that leads to a relatively high equilibrium wage in the market.
This analysis can be applied to answer some questions that often appear about the labour market. In particular, why should the top footballers and pop stars be paid such high salaries, whereas valued professions such as nurses and firefighters are paid much less?
A footballer such as Harry Kane is valued because of the talent that he displays on the pitch, and because of his ability to bring in the crowds who want to see him play. This makes him a good revenue earner for his club, and reflects his high marginal productivity. In addition, his skills are rare - some would say unique. Harry Kane is therefore in extremely limited supply. This combination of high marginal productivity and limited supply leads to a high equilibrium wage rate.
