Labor Supply Curve

Labor supply curve derivation

Economists need to analyze the labor market, and they do this with the help of the labor market graph, which is plotted with the wage rate (W) on the vertical axis and quantity or employment (Q or E) on the horizontal axis. So, what are the wage rate and the quantity of employment?

Here, we are focusing on labor supply, and to show this on the labor market graph, economists use the quantity of labor supplied.

Figure 1 below shows a labor supply curve:

Fig 1. - Labor supply curve

The market labor supply curve

Individuals work by giving up leisure, and this is quantified in hours. Therefore, the labor supply curve of the individual will show hours as the quantity supplied. However, in the market, several individuals are supplying labor at the same time. This means that economists can quantify this as the number of workers available.

First, let’s look at the market labor supply curve in Figure 2.

Fig 2. - Market labor supply curve

Now let’s look at the individual labor supply curve in Figure 3.

Fig 3. - Individual labor supply curve

Labor supply curve upward sloping

We could say that by default, the labor supply curve is upward sloping. This is because people are willing to supply more labor if the wage rate is higher.

The shift in the labor supply curve

Normally, the market labor supply curve slopes upward from the left to the right. But did you know it could shift inward (left) and outward (right)? A series of factors can cause a shift in the labor supply curve.

Apart from the wage rate, a change in any factor that influences how willing workers are to work will cause the labor supply curve to shift.

These factors include:

• Changes in preferences and norms.
• Changes in population size.
• Changes in opportunities.
• Changes in wealth.

Fig 5. - The shift in labor supply curve

Figure 5 shows a shift in the labor supply curve. In the left panel, the individual labor supply curve shifts outwards (to the right) leading to more hours of employment (E1 compared to E) at any fixed wage rate W. In the right panel, the individual labor supply curve shifts inwards (to the left) leading to fewer hours of employment (E1 compared to E) at any fixed wage rate, W.

Changes in preferences and norms and shifts in the labor supply curve

A change in societal norms can result in a change in labor supply. For instance, in the 1960s, women were limited to household work. However, as society progressed over the years, women were increasingly encouraged to pursue higher education and explore broader employment options. This resulted in more women working outside of the home today. This means the willingness and availability of labor have both changed (increased), shifting the labor supply curve to the right.

Population changes and shifts in the labor supply curve

When the population size increases, this means more people are available and willing to work in the labor market. This causes a shift in the labor supply curve to the right. The opposite is true when there is a drop in the population size.

Changes in opportunities and shifts in the labor supply curve

When newer, better-paying jobs emerge, the labor supply curve for a previous job can shift to the left. For instance, when shoemakers in one industry realize that their skills are needed in the bag-making industry for higher wages, the labor supply in the shoemaking market decreases, shifting the labor supply curve to the left.

Changes in wealth and shifts in the labor supply curve

When the wealth of workers in a given industry increases, the labor supply curve shifts to the left. For instance, when all shoemakers get wealthier as a result of an investment the shoemakers’ union made, they will work less and enjoy more leisure.