3.1.17 - Supply of Labour

Question 1

What does the individual supply curve of labour show?

Answer 1

The relationship between the wage rate and the quantity of labour a worker is willing to supply.

Question 2

What is the opportunity cost of working?

Answer 2

An hour of leisure time.

Question 3

What two effects occur when the real wage rate increases?

Answer 3

Two effects take place: substitution effect and income effect.

Question 4

Define the substitution effect in the context of labour supply.

Answer 4

A rise in real wage increases the opportunity cost of leisure, encouraging workers to supply more labour.

Question 5

Define the income effect in the context of labour supply.

Answer 5

A rise in real wage increases an individual’s income, which may encourage or discourage additional work hours depending on the wage level.

Question 6

What impact does a low wage rate have on the income effect?

Answer 6

It may encourage additional hours to be worked.

Question 7

What impact does a high wage rate have on the income effect?

Answer 7

It may discourage work, as leisure is viewed as a normal (luxury) good.

Question 8

What is the outcome of the substitution and income effects on the supply of labour?

Answer 8

The backward-bending supply curve of labour.

Individual (Backward-bending) Supply Curve of Labour

Question 9

What occurs at the ‘bend’ in the individual supply curve?

Individual Labour Supply Curve

Answer 9

The ‘negative’ income effect begins to dominate the ‘positive’ substitution effect

Question 10

What happens to the number of hours of labour supplied when real wage rates rise beyond the bend of the individual labour supply curve?

Answer 10

There will be a fall in the number of hours of labour supplied

Question 11

How is the industry supply curve of labour determined?

Answer 11

By adding together all of the individual supply curves in a particular occupation (e.g. Doctors)

Industry Supply Curve of Labour

Question 12

What is the general slope of the industry supply curve of labour?

Answer 12

Upward-sloping

Question 13

In an industry, what does an increase in real wage rate imply for the supply of labour?

Answer 13

An increase in the supply of labour

Question 14

What effect dominates in the industry supply curve of labour?

Answer 14

The substitution effect dominates

Question 15

What Factors (if changed) can result in a shift of the Supply Curve for Labour in an Industry?

Answer 15

1. Non-monetrary considerations
2. Earnings/non-monetary considerations in other industries (occupations)
3. The Value placed on Leisure Time
4. The Working population
5. Migration
6. Trade-Unions
7. Taxes and Benefits

Question 16

How can a change in Non-monetary considerations of an occupation result in a shift in the Supply Curve of Labour for an industry?

Answer 16

• Workers consider several non-monetary factors, e.g. Career progression, Benefits, Working Conditions, etc.
• If these factors make the job more attractive, then more labour will be supplied at each and every wage rate (Supply of Labour shifts to the right)

Question 17

How can a change in Earnings/Non-Monetrary considerations in another occupation result in a shift in the Supply Curve of Labour for an industry?

Answer 17

• Other jobs in other industries may become less attractive (lower paying, fewer benefits, etc.)
• If so, then supply of labour will increase for the industry that is now more attractive in comparison.

Question 18

How can a change in the Value placed on Leisure Time result in a shift in the Supply Curve of Labour for an industry?

Answer 18

• If people attach less value to leisure time, then supply of labour will increase at each and every wage rate

Question 19

How can a change in The Working Population result in a shift in the Supply Curve of Labour for an industry?

Answer 19

If working population increases, there are likely to be more labour supplied in each industry

Question 20

How can a change in Migration result in a shift in the Supply Curve of Labour for an industry? Where is this shift more likely to occur?

Answer 20

• Migrants are usually of working age, so the supply of labour at all WRs tends to increase.
• Supply of Labour at lower wage rates most likely to be affected as Migrants are usually from economies with lower Average Wages than UK min wage.

Question 21

How can a change to Trade Unions result in a shift in the Supply Curve of Labour for an industry?

Answer 21

• Presence of TUs could attract workers to labour markets as they know their employment rights will be defended.
• Laws against TUs in certain industries, such as limiting ability to strike, might cause some people to withdraw from the labour market.

Question 22

How can a change to Taxes and Benefits result in a shift in the Supply Curve of Labour for an industry?

Answer 22

If taxes are too high and benefits are too generous, people might be inclined to withdraw from the labour market.

Question 23

What does the PES of Labour Measure?

Answer 23

The Price Elasticity of Supply (PES) of Labour measures the responsiveness of the supply of labour to a change in the Real Wage Rate.

Question 24

What are the consequences of a right shift in demand for Labour when the Supply of Labour is PES Inelastic?

Answer 24

• Price rises from P1 -> P2
• Quantity of Labour rises less than proprtionately to the rise in Price (Q1 -> Q2), as workers are unresponsive to the change in W/R

Supply (Inelastic)/Demand for Labour Diagram

Question 25

What are the consequences of a **right shift in demand for Labour** when the Supply of Labour is **PES Elastic**?

Answer 25

* Price rises from P1 -> P2 * Quantity of Labour rises **MORE than proprtionately to the rise in Price** (Q1 -> Q2), as workers are more responsive to the change in W/R

Question 26

What Factors is PES determined by?

Answer 26

1. Skills - Skilled Occupations -> Inelastic, rise in W/R unable to attract workers who are unqualified. 2. Training Period - Long -> Inelastic (Workers cannot immediately enter occupation even if they are attracted to a rise in W/R) 3. Professional Accreditation - Where a worker must be a member of professional bodies, PES will be more inelastic 4. Vocation - where workers are not motivated as greatly by non-monetary factors (teaching/nursing), the PES will be more inelastic. 5. Time - Inelastic in Short Run, More Elastic over time

Question 27

What does Labour Immobility mean?

Answer 27

* Labour does not 'move' to where it is greatest in demand

Question 28

What type of inefficiency does Labour Immbolility create in the Labour Market?

Answer 28

Allocative Inefficiency

Question 29

Can Labour Immbolility be considered market failure?

Answer 29

Yes since it creates DWL, as shown on the diagram

Question 30

What are the three types of Labour Immobility?

Answer 30

1. Geographical 2. Industrial 3. Occupational

Question 31

What is Geographical Immobility?

Answer 31

When workers are unable/unwilling to move regions/towns to where the demand for Labour is greatest.

Question 32

What factors impact Geographical Immobility?

Answer 32

* Existence of House Price Variation between regions (e.g. London vs Yorkshire) * Existence of social/familial ties (e.g. parents unwilling to disrupt their children's education by switching schools) * Existence of Stress when moving houses.

Question 33

What is Industrial Immobility?

Answer 33

When workers do not move between industries * e.g. when workers do not move from employment in the motor industry, to employment in the insurance industry.

Question 34

What factors impact Industrial Immobility?

Answer 34

* Skill Mismatch - Workers lack the skills required for other industries * Training barriers - limited access to retraining or vocational education can prevent workers from adapting to new industries * Resistance to Change - Workers may be reluctant to leave familiar industries due to fear of the unknown or percieved job insecurities

Question 35

What is Occupational Immobility?

Answer 35

* When Workers find it difficult to change jobs within an industry. * e.g. difficult for a Doctor to retrain to become a Dentist

Question 36

What factors impact Occupational Immobility?

Answer 36

* A lack of transferable skills in an occupation (e.g. Coal Mining)

Question 37

How does information failure contribute to Labour Immobility?

Answer 37

Workers may not know where all the suitable jobs for them are.

Question 38

How can Labour Immobility create regional unemployment (structural unemployment)?

Answer 38

* A change in the structure of an industry in a specific region may leave some people unable to respond by changing job, industry or location (due to Labour Immobility) * As a result, many in the region remain temporarily or permanently unemployed. * e.g. After many of the UK's Coal Mines were closed under Margaret Thatcher, Coal Miners in the north were left unemployed due to Labour Immobility (no transferable skills in coal mining).

Question 39

How can Labour Immobility lead to Rising Labour Costs?

Answer 39

Firms must increase wages to encourage workers to re-locate

Question 40

What can the Government do to solve Labour Immobility?

Answer 40

1. Training - Provide re-training schemes to allow workers to develop transferable skills (e.g. numeracy/literacy) 2. Better Information - Provide more information about job vacancies so job hunting is easier 3. Subsidies - To workers or firms, to help with re-location costs (often in the form of subsidised housing) 4. FDI - Provide incentives for Overseas firms to locate subsidiaries in UK regions where unemployment is high, such as the North East. 5. Relocation - Provide incentives for domestic firms (tax breaks or investment grants) to relocate to regions in need of jobs.