labour markets supply side

Question 1

The supply of labour

Answer 1

The labour supply is defined as the number of workers willing and able to work, multiplied by the hours they are willing and able to work. It is determined by:

Question 2

The wage rate

Answer 2

The higher the wage rate, the more labour is supplied, which means the supply curve of labour will slope upwards. A worker’s wage, along with any bonus, provides the main pecuniary (monetary) benefit from working.

Question 3

The size of the working population

Answer 3

The working population is the number of people of working age (16 – 60 for women and 16 – 65 for men) who are willing and able to work. The size of the working population is influenced by the retirement and school leaving ages, migration, and numbers staying on at University.

Question 4

Migration

Answer 4

Migration can have a considerable impact on the labour market. Migrants tend to be of working age, and while the general effect is to increase the supply of labour at all wage rates, migration especially affects supply at lower wage rates. This is because migrants tend to come from low wage economies, with average wages often far below the minimum wage in the UK.

Question 5

People’s preferences for work

Answer 5

If people prefer more work, the supply of labour increases. Preferences can be influenced by a range of factors including changes in the ‘cost’ of working, such a subsidised childcare, and non-wage benefits (advantages) of working.

Question 6

Net advantages of work

Answer 6

As well as the wage rate, decisions to increase or decrease labour supply are influenced by non-monetary (non-pecuniary) advantages, such as changes in working conditions, job security, holiday entitlement, promotion prospects, and other pyschological benefits of work. Improvements in these benefits will shift the labour supply curve to the right.

Question 7

Work and leisure

Answer 7

For many, part-time work is an increasingly attractive option given the advantages of increased leisure. Early retirement is also a factor affecting labour supply.
An individual’s decision to supply labour is greatly affected by the choice between work and leisure. Given that time is fixed, work and leisure are substitutes for each other.
The choice between work and leisure can be affected by a number of factors, including:
* Age – older workers often gain more utility from leisure.
* Direct taxes – higher income tax rates may increase the utility of leisure and reduce the labour supply.
* Dependents – having children may increase the utility of work, and increase the labour supply.
* Non-work income – some individuals can retire from the labour market because they have company pensions which may be received before state pensions, which are available for men at 65 and women at 60. Non-work income can come in the form of cash benefits, such as the Job Seeker’s Allowance, and benefits-in-kind, such as subsidised travel cards.

Question 8

Individual labour supply

Answer 8

The supply curve for an individual cannot continue to slope upwards indefinitely. Labour market theory suggests it will initially slope upwards, and then bend backwards. Up to a wage rate of W1, the relative price of leisure increases, and workers will look to switch from leisure to work. In other words there is a strong substitution effect as wages start to rise. Hence, the supply curve slopes upwards to point L.

However, beyond W1, the income effect begins to dominate and further rises in money wages, which increase real income, mean that less work is required to achieve the same level of real income.

Question 9

Length of training of workers

Answer 9

If workers need lengthy training, the effective supply of labour is less in the short run.

Question 10

Barriers to entry

Answer 10

Barriers to entry into the labour market, such as the strict requirement for qualifications, will make the supply of labour less than it would be with no barriers.

Question 11

Trade Unions

Answer 11

A trade union is an organisation that aims to protect the interests of workers. Around 30% of UK employees are members of unions, with women more likely to be in a union than men. Union membership has fallen steadily over the last 20 years.

Question 12

what three ways cam unions affect the supply of labour in three ways

Answer 12

1. Firstly, unions can attract workers into the labour market because of the benefits of becoming a member. This will shift the supply curve to the right.
2. Secondly, unions exert control over the labour supply and can withdraw labour by limiting working hours or going on strike. A strike will shift the supply curve of labour to the left.
3. Thirdly, by influencing wages through collective bargaining the supply curve for unionised workers is more inelastic than one for non-unionised workers.

Question 13

Tax and benefit incentives and disincentives

Answer 13

Tax and benefit rates can lead to increases and decreases in the effective labour supply. When income taxes are excessive and benefits too generous, a stay-at-home culture may be encouraged.

Question 14

Labour subsidies

Answer 14

If the government gives a subsidy to workers to look for work, or to train, then the supply of labour will increase, and the supply curve will shift to the right.
The actual and potential labour supply
The actual labour supply includes those workers who are both willing and able to supply their labour, including the unemployed. The potential labour supply also includes those who, for one reason or another, are currently inactive.

Question 15

Factors that might account for this gap include:

Answer 15

1. Possible differences in the level of human capital development, especially formal education because women may invest less in their own human capital development than men.
2. There may be productivity differences (in manual work), although this is clearly a minor factor in a service sector economy.
3. The number of hours worked, and career breaks will affect labour productivity. On average, women work fewer hours than men (35 hours per week, for women and 40 hours for men. It is estimated that this alone contributes around 12.5% of the difference). (Source: OECD)
4. Women are often crowded into low-paid jobs, with low skill levels.
5. Women are also often crowded into part-time jobs, with lower pay relative to full-time employees.
6. In contrast, women are often crowded out of higher paid jobs through discrimination, or are discriminated against in terms of promotion. Females often make up a very small percentage of senior jobs.

Question 16

Female pay as a percentage of male pay has been rising over the last 15 years. Despite the differences that still exist, the gap between male and female pay is narrowing.
Possible explanations for this include:

Answer 16

1. The human capital of females is catching up with that of males because female performance in formal education has improved. Girls achieve higher GCSE and ‘A’ level grades and are rapidly catching up in terms of degree performance.
2. A decline in the impact of discrimination, due to the gradual impact of the Equal Pay Act, 1970, and other legislation.
3. More females are becoming employers, and this reduces the likelihood of discrimination.
4. Government support for equal opportunities initiatives, such as Opportunity 2000 (now called Opportunity Now.)
5. The growth of the service sector and decline in the manufacturing sector has also contributed to a narrowing of the pay gap. Changes in the structure of the economy may have benefited females in relation to males. The growth of the service sector has led to a relative increase in demand for service sector workers, which has also increased wages in parts of the service sector in comparison with declining relative wages in the manufacturing sector.
6. The introduction of the national minimum wage in 1997 had a proportionately bigger effect on female wages, compared with male wages.