Supply of Labour

Question 1

What are the factors that determine an individual’s supply of labour?

Answer 1

1 Higher wages usually will encourage a worker to supply more labour because work is more attractive compared to leisure

2 However, a worker isn’t just interested in earning money; they are also interested in leisure. Therefore, there is a choice between working more (higher wage) and working less (more leisure)

Question 1

What is the substitution effect of a rise in wages?

Answer 1

With higher wages, workers will give greater value to working than leisure. With work more profitable, there is a higher opportunity cost of not working. The substitution effect causes more hours to be worked as wages rise

Question 2

What is the income effect of a rise in wages?

Answer 2

This occurs when an increase in wages causes workers to work fewer hours. This is because workers can get a higher income by working fewer hours. Therefore they may work less.

Therefore, after wages rise, workers may work less because they can get their target income with fewer hours spent working

Question 3

Graphically depict the backward sloping supply of labour

Answer 3

Up to W1, the substitution effect is greater than the income effect, and higher wages causes more hours worked.

After W1, the income effect outweighs the substitution effect. Now people work fewer hours because they can get their target income from a lower number of hours

Question 4

1 Market supply of labour for a particular vocation depends upon:

Answer 4

1. The number of qualified people

For example, the number of qualified accountants is low, therefore supply is quite inelastic. For a job such as fast food operator, the number of potentially qualified people is a high percentage of the labour force, therefore supply is much more elastic

Question 5

2 Market supply of labour for a particular vocation depends upon:

Answer 5

2. Difficulty of getting qualifications

If it is difficult to get particular qualifications, supply will be inelastic. For example, even if wages of economics teachers rose, the supply would be quite inelastic – to become qualified would take several years.

Question 6

3 Market supply of labour for a particular vocation depends upon:

Answer 6

3. The non-wage benefits of a job

Unpleasant jobs will have fewer people willing to do them therefore supply will be relatively lower. Although many unpleasant jobs, such as cleaning are relatively low-skilled so may still be low paid

Question 7

4 Market supply of labour for a particular vocation depends upon:

Answer 7

4. The wages and conditions of other jobs

If many jobs in a local area are considered unpleasant – e.g. fruit pickers, then the supply of alternatives will be relatively higher

Question 8

5 Market supply of labour for a particular vocation depends upon:

Answer 8

5. Demographic changes and immigration

Some jobs, such as fruit picking are unpopular with native-born workers and rely on immigrant labour. If immigration slows down, there can be vacancies in these particular jobs. Post-Brexit vote, farmers reported difficulty in filling labour vacancies due to a slowdown in immigration.

Question 9

Graphically depict the impact of an increase in the supply of Labour

Answer 9

An increase in the supply of labour leads to a fall in the wage rate from W1 to W1. Quantity increases from Q1 to Q2

Question 10

Graphically depict the effect of an increase in the supply AND demand of labour

Answer 10

If immigration led to an increase in the supply of labour (more workers) then wages would initially fall. However, net migration would also lead to an increase in demand for labour because the new workers create additional demand in the economy.

Question 11

Graphically depict the supply of labour in a perfectly competitive industry

Answer 11

In a perfectly competitive labour market, wages are determined by supply and demand (We). For an individual firm, the supply of labour is perfectly elastic. They are wage takers and employ workers at the market wage of We.

Question 12

Graphically depict the relationship between wages and elasticity of supply

Answer 12

If supply is more inelastic, this tends to lead to higher wages. (Supply 1) leads to W2

Question 13

What is the lump of labour fallacy?

Answer 13

The lump of labour fallacy is the contention that the amount of work available in an economy is fixed. But, most economists argue this belief (there is a fixed number of jobs or a fixed number of hours) is usually incorrect

Question 14

Graphically depict the effects of immigration on the supply AND demand of labour

Answer 14

Question 15

Describe the net effects of migration

Answer 15

Immigration increases labour supply – so we may expect a fall in wages.

However, this is only half the story. Net migration increases demand in the economy, causing an equivalent rise in demand for labour. The net effect should be – wages stay constant. (Though we can see differing impacts in certain labour markets – depending on skill levels of migrants)