Labour Supply

Question 1

What is the individual’s choice between work and leisure?

Answer 1

The alternative to working is to enjoy leisure time. For each hour an individual works, he foregoes an hour of leisure. One hour of leisure = opportunity cost of supplying an hour of labour

Question 2

What happens to an individuals supply of labour if real wages increase?

Answer 2

(Reference the backward bending individual supply curve)

Increase in wages results in less labour being supplied

Question 3

What are the two factors impacting a individuals labour supply as a result of an increase in wages?

Answer 3

1. Income and substitution effects - if wages rise, leisure becomes more expensive (higher opportunity cost) = more tendency to substitute extra hours of work, replacing hours of leisure.
2. Target income - people with higher wages are likely to work less and gain the same amount of income (already achieved target income) - people with lower wages likely o work more to achieve target wage. People would rather have time than money at a certain level

Question 4

What happens to the supply of labour in an industry to a rise in wage?

Answer 4

(Look at graph in notes)
A change in the wage level in an industry causes an extension in the labour supply curve. Despite backward bending individual supply curve, higher wages is likely to attract new workers to the industry

Question 5

Define elasticity of the labour supply?

Answer 5

The elasticity of the labour supply measures the responsiveness of labour supply to a change in real wages. This varies from industry to industry

Question 6

What does the elasticity of the labour supply depend upon?

Answer 6

1. The nature of the skill required for the job - Jobs with specific skills aren’t likely to attract new workers as fewer people possess the necessary skills. Inelastic
2. Length of training period - longer training - less elastic
3. Vocation - Jobs which have vocational element tend to have low elasticities - reward from work not entirely monetary
4. Time span under consideration - takes time for workers to adjust labour supply decisions - greater for a longer period

Question 7

Factors effecting shifts in the labour supply?

Answer 7

1. Increase in working population - more workers in the economy - more workers likely to be in an industry
2. Changes in working conditions and levels of non monetary rewards
3. Changed wage levels
4. Change in the value placed on leisure time