Labour supply

Question 1

Define a non pecuniary benefit

Answer 1

benefits offered to workers by firms that are not financial in nature

Question 2

Define the income effect?

Answer 2

Income effect- the change in demand for a good or service caused by a change in the consumers purchasing power

Question 3

Define the substitution effect?

Answer 3

as prices rise, or income decreases, consumers will replace more expensive items with cheaper alternatives

Question 4

What is the trade off for labour?

Answer 4

there is a trade off between increasing hours of labour and free time/ leisure: potential wages are the opportunity cost of labour

Question 5

How do changes in the wage rate Impact on income effect and substitution effect, and what effect does this have on the shape of the labour supply curve?

Answer 5

• As the wage rate increases, workers will substitute more leisure for work (substitution effect) but as wages rise above a certain level the income effect takes place and they demand less labour as their wages rise
• backwards bending supply curve which bends back when the income effect dominates the substitution effect

Question 6

What does the strength of the income effect depend on?

Answer 6

1) non-pecuniary benefits may overwhelm the income effect, workers may gain utility from the work itself despite low or zero pay
2) low pay- if the wage rate is low many worker would be more willing to offer labour rather than less willing to maximise their income

Question 7

What does the strength of the substitution effect depend on?

Answer 7

1) non pecuniary benefits may overwhelm the substitution effect, workers gain utility from the work itself they may work full time regardless of how high pay rises

Question 8

What are monetary factors affecting supply of labour?

Answer 8

wages/salary

Question 9

What non monetary factors affect the supply of labour?

Answer 9

• demand for the goods that the labour produces (derived demand)
• perks of the job eg company car/phone
• flexible hours
• employee discount
• job security
• availability of training
• level of qualification required (barriers to entry)
• competitiveness of wages

Question 10

What factors affect the wage elasticity of supply of labour??

Answer 10

• skill level of job
• number of unemployed people
• mobility of labour ie occupational and geographical mobility