5.2 Supply of Labour

• Supply of labour

  Total hours that labour is willing to supply at a given wage rate
• Influences on the supply of labour

  • The number of hours an individual worker is willing to supply at a given wage - short run supply of labour
  • The supply of labour to an industry or occupation
• Short-run supply of labour

  The time period when there is insufficient time for an individual to change their job / occupation
• Wage rate


  The key influence on the supply of labour in the short run
• If the wage rate increases


  An individual worker will choose to supply more hours of labour
• Opportunity cost

  More time at work will mean sacrificing the next best alternative (leisure time)
• Substitution effect

  As wages rise, the opportunity cost of choosing leisure over work increases, so individual workers are more likely to substitute work for leisure and increase the number of hours they work
• Income effect

  Work is arguably an inferior good, so after a certain point, the higher the income, the fewer hours individuals will wish to work
• At low levels of income, the positive substitution effect outweighs the negative income effect of a wage rise
• At higher levels of income, the negative income effect balances out the positive substitution effect of a wage rise so it has no effect on working hours
• At high levels of income, the negative income effect outweighs the positive substitution effect of a wage rise
• The backward-bending individual labour supply curve

  1. At a low wage of W1 an individual would be willing to supply L1 hours of labour

  2. As the wage rate increases to W2 the positive substitution effect means the individual will substitute work for leisure and supply more hours L2

  3. As the wage increases to W3 the negative income effect becomes stronger - work is arguably an inferior good. The higher an individual's income (wages) get the less they will want to work as they are not prepared to sacrifice leisure time (the consumption of normal goods). At the higher wage of W3 the individual is now willing to supply less hours at L3
• Long run supply of labour

  The total number of workers willing and able to work in a given occupation or industry at a given wage
• It is more helpful to consider occupations rather than industries when considering the supply of labour
• Influences on the supply of labour in the long run

  • The wage rate
  • The opportunity to work overtime
  • Availability of bonuses
  • The convenience and flexibility of hours
  • Status
  • Promotion chances
  • Flexibility of location
  • Qualifications and skills needed
  • Job security
  • Pleasantness of the job
  • Holidays
  • Perks and fringe benefits
  • Quantity and quality of training on offer
  • Location
  • Recent performance of the firm / occupation
  • The wage prevailing in other occupations or industries
  • Demographic structure of the population & availability of migrant workers
• Pecuniary factors

  Monetary factors that influence the supply of labour, such as the wage rate, opportunity to work overtime, and availability of bonuses
• Non-pecuniary benefits


  Benefits offered to workers by firms that are not financial in nature, such as job satisfaction, pleasantness of the job, and fringe benefits
• Decisions about labour supply in some occupations may be influenced by job satisfaction
• Some firms / occupations provide benefits that are not fully reflected in wages, known as fringe benefits, such as subsidised meals, leisure facilities, social events, company cars, pension schemes, job security, and in-work training
• Non pecuniary benefits

  Benefits offered by firms that are not fully reflected in wages, e.g. subsidised meals, leisure facilities, social events, company cars, pension schemes, job security, in-work training
• Pecuniary factors

  The wage on offer
• Non pecuniary factors

  Job satisfaction and fringe benefits
• Net benefits or net advantages

  The overall package offered by employers/occupations, including both pecuniary and non-pecuniary factors
• Non-pecuniary factors

  Can be negative and discourage workers from supplying labour, e.g. stress, unpleasant or dangerous working conditions
• Impact on the supply of labour of an improvement in fringe benefits

  Shift the supply curve of labour to the right (S2)
• Supply of labour to a firm (in a perfectly competitive factor market)


  • Perfectly inelastic (fixed)
• Supply of labour to an industry or occupation

  • Upward sloping, because: pool of potential workers may enter if wages rose, immigration could expand, increasing incentives to work, social trends
• Influences on the supply of labour to a market/occupation

  • The wage prevailing in other occupations/industries
  • The skills needed for the job and the cost/difficulty of acquiring those skills
  • Non-pecuniary benefits of the job and those offered by firms
  • Demographic factors
• Influences on the supply of labour for an individual (in the short run)

  • Choice between work and leisure - income/substitution effects
• Influences on the supply of labour in general (to the economy as a whole)

  • Demographics/population changes
  • Changes in 'activity rates'
  • Net migration of labour
• Wage elasticity of supply of labour

  The responsiveness of the supply of labour to a change in the wage rate
• Factors influencing the wage elasticity of supply of labour

  • The availability of labour
  • The availability of labour in other occupations
  • Skills needed
  • Qualifications needed
  • The immobility of labour
  • The time period/long-run elasticity
• Transfer earnings

  The minimum payment needed to keep a factor of production in its present use
• Economic rent


  The payment over and above the transfer earnings, which does not affect the allocation of resources
• What determines the balance between transfer earnings and economic rent

  The elasticity of supply of labour