Supply of Labour

Individual Supply of Labour

Income effect

The income effect is where a rise in wages makes people feel better off and therefore they may not feel a need to work as many hours.

Substitution effect

As wages rise the opportunity cost of leisure rises. This means that the cost of every hour taken for leisure rises, as this time could have been spent earning money. As wages rise, the substitution effect may lead to more hours being worked.

Diagram

Each individual has an optimum amount of income. E.g, £1,110 optimum

Once an individual is making more than this, they will experience the income effect more than substitution effect.

Evaluation

Assumes that everyone can change their hours easily - Many people have fixed-hour contracts and cannot easily change their hours.

Labour Supply for an economy

Change in Income

If average income is high/rising labour supply may decrease, because more people retire early and reach their optimal earnings.

Change in population

Population increases lead to a greater labour supply.

Change in expectations

• Life expectancy
• Pension age

Wage elasticity of supply of labour

Wage elasticity of supply of labour measures how responsive supply of labour is to a change in wage.

\(WES = \frac{\%\Delta\text{ in SL}}{\%\Delta\text{ in W}}\)

Factors that impact WES

Training and qualifications

A high level of training and qualifications means that it takes a long time for people to gain these qualifications, so it is not entirely driven by wage -> makes it more inelastic

Skill

A high level of skill required for -> Inelastic because fewer people have those skills, so workers are more scarce.

Vocation

If people desire a particular job, such as Nurse, or paramedic, the industry will attract workers regardless of the wage, because its what people aspire to do.

Time

Over a longer time, people can train / gain qualifications needed for higher paid jobs.