Supply of Labour

The Concept of Supply of Labour

  • Supply of Labour pertains to the total number of hours that workers are willing and able to provide at different wage rates in a given period.
  • It consists of both the existing workforce and any additional labour that becomes available when wages rise.
  • The supply of labour is influenced by both economic and non-economic factors.

Determinants of Labour Supply

  • Wage rate: If the wage rate increases (holding everything constant), more people will be incentivised to work thereby increasing the labour supply.
  • Working hours: Could affect labour supply. If more flexible hours are offered, more individuals are likely to be attracted to work.
  • Work incentives: Higher fringe benefits or better working conditions can also stimulate an increase in labour supply.
  • Barriers to entry: These could limit the supply of labour. This might include the need for specific qualifications or the existence of discrimination in the market.
  • Government policy: Policies such as tax rates, benefits policies, retirement ages, migration policy and education policy can greatly affect the supply of labour.
  • Demographics: Age, gender and family commitments can all impact a person’s willingness and ability to offer their labour.

Wage Elasticity of Labour Supply

  • The wage elasticity of labour supply measures how responsive the supply of labour is to a change in wages.
  • If the demand for labour is elastic, a given change in wages will result in a larger percentage change in quantity supplied.
  • If the demand for labour is inelastic, a given change in wages will result in a smaller percentage change in quantity supplied.

Backward-bending Supply Curve

  • This refers to the scenario where people might choose to work less as wage rates rise beyond a certain level, due to the fact that they are satisfied with their earnings and therefore prefer to enjoy more leisure time.
  • This effectively limits the extent to which rising wages will continue to stimulate an increase in labour supply.

Difference between Short Run and Long Run Labour Supply

  • In the short run, the supply of labour is relatively inelastic because individuals cannot quickly adjust their non-work commitments.
  • Over the long run, however, labour supply is more elastic as people have more time to adjust their lifestyle and commitments.