THE SUPPLY OF LABOUR: AQA Economics Specification Topic 4.1

Topic 4.1 - Individuals, firms, markets and market failure

Snapshot of the AQA syllabus topic area we’ll be covering in this post.

THE SUPPLY OF LABOUR: THE LABOUR MARKET

AQA students must understand the following content [taken from the syllabus]

• The supply of labour to a particular occupation is influenced by monetary and non-monetary considerations.

• Non-monetary considerations include job satisfaction and dissatisfaction and working conditions.

• The supply curve for labour shows the relationship between the wage rate and number of workers willing to work in an occupation.

• The causes of shifts in the market supply curve for labour.

INFORMATION YOU NEED TO KNOW

[NOTE: supporting diagrams and questions at the end]

Introduction:

The supply of labour is a key factor in determining employment trends and the level of overall economic activity. A combination of financial and non-financial factors affect people's decisions to enter the labour force and the professions they select. This page examines the numerous facets of labour supply, including the impact of monetary and non-monetary factors, the labour supply curve's structure, and the variables that might cause this curve to change.

Definitions:

• Occupational supply: the number of workers willing and able to work in an occupation at a given wage rate.

• Individual supply: the total number of hours that a person is willing and able to work at the given market wage rate.

Financial Labour Supply Factors

• Wages, along with other financial incentives, play a big role when it comes to which job roles people are interested in pursuing. Higher pay frequently increases the number of people who choose a particular profession, thus increasing the labour supply. On the other hand, lesser pay may deter people from joining or staying in the labour.

• However, non-financial factors can also affect the supply curve of the labour force.

Non-financial Labour Supply Factors:

• Job satisfaction

• The type of work (e.g. office-based or field based)

• The degree of autonomy

• The workplace environment

• How much annual holiday

• Job perks

• Job safety

• Flexibility in moving to other roles

• Staff friendliness

• How competitive the industry is

The Labour Supply Curve [see diagrams at end]:

The link between the wage rate and the quantity of workers wanting to work in a certain occupation is depicted by the labour supply curve. In general, the upward slope of the labour supply curve shows that more people are eager to work in that occupation as earnings rise. As the hourly wage falls, there are fewer workers interested in giving up their hour’s worth of leisure time.

Some Factors of Supply that Cause Shifts in the Supply Curve:

• Quantity of people willing to work

• The level of skills required in certain industries

• Job publicity

• Tax rates

• Immigration laws

The Individual’s Labour Supply curve (Backward Bending Supply)

The relationship between the wage rate and the amount of labour an individual is willing to offer at various salary levels is examined by the individual labour supply curve theory, a concept in economics. It is beneficial to comprehend how people decide how many hours to work and whether or not to enter the labour force.

According to the hypothesis, the individual labour supply curve might be backward sloping.

At first, the supply curves slopes upward, showing that people are more likely to work longer hours as wages rise.

Then, the idea of the diminishing marginal utility of income means people become less motivated to work when their hourly wage rises. This is because the marginal utility gained from working an extra hour is outweighed by the marginal cost to the individual’s free time.

The individual must take into account the following:

• Income effect: when the wage increases, individuals might choose to work fewer hours to maintain a desired level of income.

  • For example, you might be comfortable on £300 per day. If you can achieve that in 2 hours, then your desires are being met and you might choose not to work more hours.

• Substituion effect: an increase in the wage provides workers an incentive to substitute their leisure time with more work hours. This is because the opportunity cost of leisure time rises when the wage rate rises.

  • For example, if your wage goes up from £50ph to £100ph, then you might choose to work more hours and give up more free time. This is because your 1 hour of free time now has an opportunity cost to you of £100.

What’s also of importance is that due to variations in preferences, abilities, and constraints, the individual labour supply curve may change among people. Age, education, family obligations, and the presence of alternative sources of income all have an impact on an individual's labour supply decisions and the shape of their personal labour supply curve.

Remember that in most cases we assume the individual to value 1 leisure hour as a normal good, and 1 working hour as an inferior good. So, as your earn more and more money, we assume that a worker would rather have more and more leisure hours. This assumption doesn’t hold for every individual, because some people might enjoy working more than taking an hour of leisure time (take, a CEO of an MNC for example).

Conclusion:

Employers, individuals, and policymakers all need to understand the labour supply. Both financial and non-financial factors, including job satisfaction and working conditions, have an impact on the availability of labour for a certain occupation. The relationship between wage rates and people's willingness to work is shown by the labour supply curve, albeit this curve can change according to a variety of circumstances. Stakeholders may make well-informed decisions to improve workforce planning, policymaking, and economic outcomes by understanding the complexities of the labour supply. Individual labour supply might be a backward bending relationship, depending on the relative strength of the income effect vs substitution effect.

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SUPPORTING DIAGRAMS:

the labour market supply curve - the curve slopes upwards because we assume more workers to be attracted to a role if the wage rate rises

the backward bending or individual labour supply curve - at point A, the wage is relatively low, so the substitution effect is stronger than the income effect here - this means people are willing to substitute their free time with more working hours - beyond point B, the individual has met their desired target wage rate and then they choose to work fewer hours due to being compensated a higher wage - at point C, the income effect is stronger than the substitution effect

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SUPPORTING QUESTIONS

Question 1: What factors can cause a shift in the labour supply curve?

Answer:

Changes in population demographics, societal attitudes towards work, variations in educational attainment and skill levels, changes in governmental policies (such as taxes and minimum wage laws), technological advancements affecting job opportunities, and changes in the accessibility of alternative income sources (such as welfare programmes) are some of the factors that can cause a shift in the labour supply curve.

Question 2: How does the income effect impact labour supply decisions?

Answer:

The term "income effect" describes the shift in a person's labour supply brought on by changes in their income levels. People may decide to work fewer hours if their income rises because they may have reached their target income level and would rather devote more time to leisure pursuits. In contrast, a drop in revenue may cause people to hire more people since they have to put in more hours to maintain their desired level of income.

Question 3: What role do non-monetary considerations play in labour supply decisions?

Answer:

Non-financial factors that affect labour supply decisions include things like job satisfaction, working conditions, flexibility, and the need for a work-life balance. If a person's job is satisfying, fun, or in line with their own values, they may be prepared to take lower pay or fewer hours. Contrarily, poor working conditions or a lack of job satisfaction may cause people to reduce their labour force, even when better salaries are being given.