Supply of labour

Question 1

non-pecuniary benefits

Answer 1

benefits offered to workers by firms that are not financial in nature

Question 2

income effect

Answer 2

the change in demand for a good or service caused by a change in a consumer’s purchasing power

Question 3

substitution effect

Answer 3

as prices rise — or income decreases — consumers will replace more expensive items with cheaper alternatives

Question 4

transfer earnings

Answer 4

the minimum payment required to keep a factor of production in its present use

Question 4

economic rent

Answer 4

a payment received by a factor of production over and above what would be needed to keep it in its present use

Question 5

wage elasticity of supply of labour

Answer 5

a measure of the sensitivity of quantity of labour supplied to a change in the price of wages. It is measured as:

𝑊𝐸𝑆= (% change in quantity of labour supplied)/(% change in wages)

Question 6

why is does there need to be a choice between working and leisure

Answer 6

For an individual worker, a choice needs to be made between income earned from working and leisure
Potential wages are the opportunity cost of leisure
An increase in the wage rate will encourage workers to substitute leisure for work through the substitution effect
But the income effect may mean that workers will demand more leisure at higher income levels
If the income effect dominates the substitution effect, then the individual labour supply curve becomes backwards bending

However, though an individual’s labour supply curve may be backwards bending, the industry supply curve will not because higher wages attract more workers into the industry
Labour supply is likely to be more elastic in the long run than the short run as, in the long run, workers can be retrained

Question 7

Factors that can cause a shift in the supply of labour

Answer 7

Competitiveness of wages with other industries
Skills needed and the difficulty of acquiring them
Number of people with appropriate qualifications
Non-pecuniary benefits
E.g. Job security / flexible hours / holiday allowance
Net migration

Question 8

Factors affecting wage elasticity of supply of labour

Answer 8

The skill level required to do the job
Number of unemployed workers
Mobility of labour
Ability of workers to change occupations – occupational mobility
Ability of workers to move to jobs – geographical mobility
Time period

Question 9

The determinants of economic rent and transfer earnings

Answer 9

The wage rate
Non-monetary factors
Net migration

The elasticity of the supply of labour:
Skill level required
Number of unemployed workers
Mobility of labour