Supply of Labour

Supply of Labour

The supply of labour means the number of hours workers are willing and able to work in a given time period. This is not the same as the number of workers; it is possible that a given number of workers could increase/reduce the supply of labour by woking more/fewer hours.

The Supply Curve of Labour to the Whole Economy

What is true for the individual worker also applies to the overall supply of labour in the economy; in rich countries, the supply of labour may fall as incomes rise. There is evidence to support this. The average length of the working week in western European countries has tended to fall in the recent decades as real wages have risen. However, it should be noted that a country may still be able to increase its supply of labour through any of the following policies:

  1. Encouraging inward migration
  2. Raising the age at which people can receive state pensions
  3. Cutting benefits and income taxes to make work more attractive compared to unemployment
  4. Making it easier for both parents to work, by providing creches
  5. Investment in education and training to increase the number of skilled workers

The supply curve of labour to the whole economy may therefore be the ‘normal’ upward sloping curve, rather than backward sloping at higher wage rates.

Non-monetary Factors

When considering the labour supply to a particular industry, it should be remembered that the wage rate may not be the only factor that determines people’s willingness to work. The following factors may also be important:

  1. working conditions – things like safety, comfort, stress levels can be important considerations
  2. job satisfaction – some workers may choose a lower paid job if it offers more satisfaction or sense of achievement; for instance nursing is paid less well than some occupations with a similar skill level.
  3. convenience – for some workers it may be important to have a job that is nearby and where hours are flexible, to fit in with other commitments.

The Supply of Labour to an Industry

The supply curve of labour to a particular industry is likely to be the ‘normal’ upward sloping rather than a backward sloping curve, for the following reasons:

  1. An industry can attract workers from other industries by offering higher wage rates
  2. New workers (such as previously unemployed people or mothers returning to work) may be attracted to the industry by higher wages.

For both these reasons, an industry can expect to recruit more labour at higher wage rates, in spite of a possible negative income effect.

Supply Curve of Labour for an Individual Worker

Neo-classical theory predicts that an individual will initially choose to work more hours as the wage rate rises, but beyond a certain level, further increases in the wage rate will result in the worker choosing to work fewer hours. This is shown in Fig 1 below:

Supply of Labour, figure 1

The real wage rate means the actual purchasing power of wages; ie the nominal or money wage adjusted for any changes in the price level.

At wage rates below W1, the supply curve is the normal upward sloping curve, indicating that the worker is prepared to work more hours as the wage rate rises.

Between wage rates W1 and W2, the supply curve is vertical, indicating that over the that range, changes in the wage ratehave no effect on the number of hours of work offered.

At wage rates rise above W2, the worker is prepared to work fewer hours.

The shape of the supply curve for labour can be explained as follows:

The worker can choose how to allocate his time between work and leisure. By working more hours he gets more income with which he can buy more goods and services.

The wage rate represents the opportunity cost of leisure. As the wage rate rises, the opportunity cost of an hour’s leisure increases.

This will lead to a positive substitution effect: the worker will substitute work (ie goods and services) for leisure as the wage rate increases. In other words he will choose to work more hours.

But the more hours he works, the more scarce (and hence more valuable) his leisure time becomes. So the substitution effect will get weaker as he works more hours.

There is also an income effect of an increase in the wage rate. If the wage rate increases, the worker can enjoy the same quantity of goods and services by working fewer hours (and enjoying more leisure). The income effect is therefore likely to be negative; the worker will choose fewer hours of work as the wage rate rises.

At low levels of income the postive substitution effect is likely to be greater than the income effect, so a rise in the wage rate will result in more hours of work.

Because the substitution effect weakens as more hours are worked, there comes a point when the income and substution effects cancel each other out. This is shown over the range of wage rates between W1 and W2.

At wage rates above W2 the income effect is greater than the substitution effect, so the indiviual chooses to work fewer hours. The supply curve is now sloping backwards.

Elasticity of Supply of Labour to an Industry

The elasticity of supply of labour to an industry measures the extent to which the supply of labour is responsive to changes in the wage rate. Where it is relatively elastic, firms will be able to recruit more labour with only a modest increase in the wage rate. Where it is inelastic it may be necessary to offer a substantial increase in the wage rate to attract even a small number of aditional workers.

The elasticity of supply of labour depends on:

The level of skill required – the supply of skilled labour is usually more inelastic than unskilled labour. This is because skilled labour is usually specific to a particular industry. For instance doctors have specialist skills and knowledge. It isn’t possible to increase the number of doctors in a hospital by recruiting accountants to do the job of treating patients.

Unskilled labour, by contrast is less specific to a particular industry. It would be possible, for instance, for a supermarket to ‘poach’ workers to stack shelves from a firm that employs cleaners. The cleaners could soon learn to do the work of shelf stacking.

The time period in question – the supply of labour is more elastic in the long run compared to the short run. It is possible to train more workers to do new jobs with time. For instance more I.T. professionals could be trained over a number of years, but it is not possible for people to acquire these skills in a shorter period.

The level of unemployment in the industry – where there is a high number of unemployed workers in an industry the supply of labour will be relatively elastic. Firms will find it easy to recruit without offering a significant increase in the wage rate.

The Supply of Labour to an Individual Firm

Where firms are operating in a perfectly competitive market, where there is a large number of small firms competing to hire the same kinds of labour, it is likely that the supply curve of labour to each firm will be perfectly elastic. This is because each firm only employs a very small fraction of the total labour supply and therefore has no influence on the market wage rate. It can hire as many/few workers as it likes at the market wage rate. The firm is a price taker in the labour market. The supply curve of labour for the individual firm is therefore a horizontal straight line at the market wage rate.

Where there is only one, or a few large employers of a particular kind of labour, the supply curve of labour to the individual firm will be upward sloping; to attract more workers, the firm will have to offer higher wages. For instance, the government employs nearly all the teachers in schools, and doctors and nurses in hospitals. To encourage more people to go into these occupations it may be necessary to raise wage rates.

Labour Mobility

Geographical labour mobility refers to the ease with which workers can move from one place to another in pursuit of work.

Occupational labour mobility refers to the ease with which workers can switch from one kind of work to another.

If there was complete (or perfect) geographical and occupational mobility there would be a single, unified labour market and wage rates would be the same everywhere, in all occupations.

In reality there are barriers to both kinds of mobility.

Geographical mobility is limited by the following factors:

  1. family ties – workers may be reluctant to move to a different part of the country and leave behind family (and friends)
  2. housing costs – the cost of housing varies greatly from one part of the country to another. House prices are much higher in the South East than in northern regions for instance. Rents in the private sector are also much higher. For workers living in social housing (council or housing association owned properties) it is very difficult to move into a similar property in another region because of the severe shortage of social housing.
  3. search costs – although many job vacancies can now be found online, it can still be costly for an individual to apply for a job in another part of the country, particularly if it involves attending an interview and having to stay overnight. This is particularly difficult for workers in low paid jobs or who are currently on benefits; the cost of looking elsewhere for work is prohibitive.

Occupational mobility is limited by the following factors:

  1. differences in natural abilities – some workers will not have the intellectual or physical capabilities of doing some kinds of work. We can’t all choose to be rocket scientists or rock stars, for instance
  2. access to training and education – there are still major obstacles for many people in getting places at top universities to study for ‘elite’ occupations such as law and medicine, for instance. Occupational mobility is closely linked to the wider problems of differences in opportunities for people from different classes, gender and ethnicity.
Explain why the supply curve of labour for an individual worker is likely to bend backwards.
Your answer should include: opportunity cost / income / substitution