Supply for Labour

What is the supply for labour?

Labour supply refers to individuals’ decisions with regards to how much of their labour to supply in the labour market. In economics, we refer to the rest of the hours that aren’t work hours as leisure. An individual will choose how many hours they want to dedicate to work and how many to leisure depending on their individual preferences.

Supply for labour graph

We can illustrate the basic concept of the supply of labour in the form of a diagram as in the figure below.

Fig. 1 - The labour supply curve

Figure 1 illustrates the number of hours a worker is willing and able to supply at a given wage rate. In the figure you can see that the curve is upward sloping for any form of industry. If wages in a particular industry were to rise, more workers would try to work in that industry because they would be attracted by the high wages: the incentive would be receiving more money. For example, if the wage rate were to rise from W1 to W2 in a certain industry, then it would lead to an increase in employment levels in that certain industry from E1 to E2. The extent to which the labour supply would increase from E1 to E2, however, depends on the elasticity of the supply of labour.

An individual’s supply of labour

The supply for labour curve shows the number of hours of labour a worker is willing to supply. Let’s apply this concept to a real-life example. Remember that the worker is supplying the hours of labour at different hourly wages. Figure 2 shows the impact a change in wage has on the number of hours supplied by an individual worker.

Fig. 2 - Effect of a wage increase on the supply of labour

In figure 2 you can see that the x-axis is labelled as the ‘quantity of labour’ in terms of hours of labour per week. On the y-axis, you can see the hourly wage rate, the amount of money an individual worker receives per hour worked.

The supply for labour effects

There are two effects associated with the labour supply, namely substitution effect and income effect.

The substitution effect

There are two ways in which you spend your time, either working or doing leisure activities. With an increase in the wage rate, working becomes much more attractive than spending your time in leisure activities. As a result, you will choose to substitute your leisure activities for more hours of work.

The income effect

The income effect states that when there is an increase in the hourly wage rates, there will be an increase in the real income. If we consider ‘leisure’ to be a normal good, then the effect an income increase would have is that the demand for leisure would increase, which would lead to a reduction in the quantity of labour supplied.

Factors affecting the supply of labour

There are two main factors when considering the supply of labour: monetary and non-monetary factors. We will go over both of them by explaining the concept of net advantage.

The standard supply for labour curve suggests that the worker supplies more labour to increase private economic benefit or personal economic welfare. The welfare that is derived from the supply of labour is divided into two: the monetary and non-monetary factors when combined make up the net advantage.

Monetary factors refer to the utility derived from wages whereas non-monetary factors refer to the utility derived from other aspects of working such as job satisfaction (could also be job dissatisfaction, office atmosphere, feelings about the workplace, etc.)

The choice the individual worker makes in selecting the right job is dependent on the net advantage derived from the chosen occupations. Non-monetary factors, however, usually change slower than monetary ones. An increase in the wage of a certain occupation should lead to an increase in the supply of labour as it increases the net advantage of that certain job in comparison to others.

To summarise, the net advantage is the sum of the utility derived from receiving a wage as well as the utility derived from working in that certain occupation.

Shifts in the market supply curve of labour

We have already established some factors that influence the supply of labour in the labour market: monetary (wages) and non-monetary factors. The important ones include improvements in working conditions, job satisfaction, job security, and holiday entitlement. An improvement of such factors will lead to a shift to the right in the supply for the labour curve and a deterioration of these factors will lead to a shift to the left.

In addition, a change in attitude towards leisure as well as work will influence the supply curve for the labour market. For example, if an individual worker values leisure more than work, then we will see that the worker works fewer hours at the given wage rate and the supply for labour curve will shift to the left.

There are many factors that could shift the labour supply curve. The three main ones are changes in income, expectations, and populations.

Changes in income

Changes in income can shift the supply curve in two ways, either to the left or to the right depending on whether an individual considers leisure activities to be a normal or inferior good. If an individual considers the leisure activity to be a normal good, then an increase in income would increase the demand for leisure, but shift the supply of labour to the left, as labour is now being substituted with leisure.

On the other hand, if an individual considers leisure activities inferior goods, an increase in their income would lower the demand for leisure and shift the supply of labour to the right, where they supply more labour.

Changes in populations

An increase in the population such as immigration could increase the supply for labour and thus shift the labour supply curve to the right. A reduction of the population, on the other hand, would reduce the supply of labour and the overall labour force, and cause the labour supply curve to shift to the left.

In addition, a fall in the number of people that are eligible for work (before going to retirement) will also cause the supply for labour to reduce. This scenario could be offset by people who are still going to be in the workforce who have reached retirement age deciding to work longer to finance their retirement.

Changes in expectations

If the people of the older generations have poor expectations of their future pensions such as receiving a lower amount of money than expected, we can expect them to stay longer in the workforce and thus increase the supply of labour in the labour market. On the other hand, a rise in the proportion of people in higher education tend to reduce the supply of labour.

The elasticity of labour supply

Below are the factors that influence the elasticity of the supply of labour.

1. The skills someone has at hand can influence the elasticity of the labour supply. Unskilled workers' elasticity of supply tends to be more elastic than those that possess specific skills and training. Think about how an increase in the wage of unskilled labour would significantly increase the number of people willing to work. However, an increase in wage in an industry like AI would not generate a higher labour supply. Individuals need severe training and education to supply their labour in AI. Hence, the supply is more inelastic.
2. External factors that reduce the occupational and geographical positions and mobilities of labour such as having the workplace far away from the worker's place of stay (different city, council, state, etc.) tend to reduce the elasticity of the supply for labour.
3. The supply of labour is more elastic in the long run than it is in the short run. That's because workers in the long run have the time to seek new jobs, learn new skills, and adjust to the changes in the labour market.

Now that you’ve familiarised yourself with the supply for labour, test your knowledge using the flashcards.