Supply of labour

• Individual labor supply


  The supply curve for the individual, not the firm, industry or market
• Key choice for individuals


  Whether to work or use time for leisure
• Opportunity cost


  If I decide to work, I am not enjoying leisure time. If I'm enjoying leisure time, I'm not working in that time.
• Determinants of individual labor supply curve


  • Income effect
  • Substitution effect
• Income effect


  As wages go up, incomes will rise, leading to a positive income effect where individuals work more to increase income. But it can also be negative if individuals have a target income and work less as wages rise to reach that target.
• Substitution effect


  As wages rise, the opportunity cost of leisure time increases, providing an incentive to work more.
• Determining the shape of individual labor supply curve


  Interplay of income effect and substitution effect
• Individual labor supply curve


  • Backward bending shape, with 3 sections
• In first section (low wages)

  Positive income effect and positive substitution effect, overall wage effect is positive
• In second section (higher wages)


  Positive substitution effect, income effect becoming negative but not enough to outweigh substitution, overall wage effect still positive
• In third section (very high wages)

  Positive substitution effect, but negative income effect dominates as individuals reach target income and value leisure time more, overall wage effect is negative
• This theory has assumptions and may not apply to everyone, but can explain real world behavior where people work less at very high wages to maintain a target income and have more leisure time
• Increase or decrease in wages

  Can lead to an increase or decrease in labor supply
• There are non-wage determinants of labor supply
• Labor market

  1. Real wage on y-axis

  2. Quantity of workers on x-axis

  3. Shift in supply curve

  4. Increase in quantity supplied

  5. Decrease in quantity supplied
• Non-wage determinants of labor supply


  • Wage in substitute occupations
  • Barriers to entry (e.g. minimum requirements, skills, qualifications)
  • Non-monetary job characteristics (e.g. benefits, working hours, breaks, treatment)
  • Occupational mobility
  • Ability to choose overtime
  • Size of working population (e.g. immigration)
  • Value of leisure time
• Higher wage in substitute occupations

  Shifts labor supply curve to the left
• Higher wage in this profession

  Shifts labor supply curve to the right
• Stricter barriers to entry

  Shifts labor supply curve to the left
• Laxer barriers to entry

  Shifts labor supply curve to the right
• More non-monetary job benefits

  Shifts labor supply curve to the right
• Poorer non-monetary job characteristics

  Shifts labor supply curve to the left
• Improved occupational mobility


  Shifts labor supply curve to the right
• Ability to choose overtime

  Shifts labor supply curve to the right
• Increase in working population (e.g. immigration)

  Shifts labor supply curve to the right
• Increased value of leisure time

  Shifts labor supply curve to the left
• Decreased value of leisure time

  Shifts labor supply curve to the right
• Industry labor supply curve


  More useful and more relevant than individual labor supply curve
• Industry labor supply curve

  • Upward sloping
  • Assumption: Wages keep increasing even though individual supply curves may be backward bending
  • Higher wages incentivize those trained but working in other professions to return to nursing
  • Higher wages incentivize economically inactive nurses to re-enter the labor force
• Wages increase


  Quantity of workers/nurses increases
• Wages decrease


  Quantity of workers/nurses decreases
• Non-wage shifters of labor supply curve

  Factors that can increase or decrease quantity of labor supply irrespective of wage
• Labor supply curve for individual firms in perfect competition

  Perfectly elastic, average cost = marginal cost = supply of labor
• Labor supply curve for individual firms in monopsony


  Upward sloping, average cost = supply curve, marginal cost curve is twice as steep and upward sloping
• Monopsonies are wage makers, not wage takers
• Reason average cost equals supply for individual firms is the same as reason average revenue equals demand for monopolies
• Elasticity of the industry labor supply curve

  Measures the responsiveness of Labor Supply given a change in the wage rate
• Elastic labor Supply


  • Proportionate change in labor Supply is greater than the change in the wage rate
• Inelastic labor Supply


  • Proportionate change in labor Supply is less than the change in the wage rate
• Determinants of elasticity of Labor Supply


  • Nature of the skills required in the job
  • Length of the training period
  • Vocational elements of professions
  • Time period under consideration