TheLabourSupply

A2Economics

TheLabourSupply(Ls)
Definingthelaboursupply
The
Thetotalnumberofhours
total number of hours thatlabouriswilling
that labour is willing
andabletosupplyatagivenwagerate
Thetotalnumberofworkers willingandableto
workinagivenoccupationorindustryfora
givenwage

Thelabourforceisdefinedasthenumberof
peopleeitherinworkoractivelyseekingpaid
employment andavailabletostartwork.

Wholeeconomylaboursupply

billions

GBP (billions)

ResidentpopulationoftheUK

Factorsaffectinglaboursupply
Demographics
Naturalrateofchangeofpopulation
Natural rate of change of population
Changestosizeofpopulationofworkingage
causedbychangesindemographicstructure

Changesinactivityrates
%ofpopulationofworkingagelookingforwork
Economicallyactivevinactiveworkers

Netmigrationoflabour
HasbeenstronglypositivefortheUKinrecent
yearsbutscaleofinwardmigrationhasslowed

billions

population in millions (billions)

UKpopulationaged16andover

Laboursupplyandpopulation

Choicebetweeneconomicactivity/
inactivity
Impactoftaxandbenefitssystem
Povertytraps
P
t t
Unemploymenttraps
Effectivenessoftrainingandeducation
Retirementagesandpensionprovision
Changingsocialattitudestoworkand
leisure
Flexibilityofemploymentcontracts

ThePovertyTrap
Disincentivestowork
Netfinancialreturntoworkingislow
Net financial return to working is low
Createsadependencycultureonwelfare
Causes
Liabilitytopayhighertax
Lossofmeanstestedwelfarebenefits
Additionalworkrelatedcosts

Trapmeansthattheeffectivemarginaltax
rateishighestforlowerincomepeople

Theeconomicallyinactiveandthe
hiddenunemployed

Measurestoreduceeconomicinactivity
Tightereligibilityforwelfarepayments
Fall in the relative value of welfare benefits
Fallintherelativevalueofwelfarebenefits
Betteraccesstoandfundingofchildcaretomakeit
moreaffordable
Investmentineducationandtraining(humancapital)
WorkingFamiliesTaxCreditsandChildrensTaxCredits
NationalMinimumWage
Amixtureofthecarrotandthestick

Laboursupplytoindividualoccupations
Factorsaffectingthemarketsupplyoflabourto
differentindustries

Market(industry)supplyoflabour
Realwageonofferintheindustryitself
Potentialforwagedrift
Earningsavailableinalternativejobs
Pay/earningsdifferentials
Publicvprivatesectorjobs(teaching,dentistry)
Barrierstoentry incertainoccupations
Tradeunioninfluences(oldclosedshopagreements)
Professionalorganisations
Professional organisations
Minimumentryrequirementsforsomejobs
Barrierscreateartificialscarcityoflaboursupply
Availabilityofmigrantlabour
Nonpecuniarycharacteristics ofajob

Nonpecuniaryaspectsofwork
Healthrisks
Opportunitiesforcareerprogression
Opportunities for career progression
Travel
Benefitsinkind
Pensionprovision(finalsalaryschemeetc)
Jobstatus
Job status
Diversityofwork
Some of these factors boost the industry labour
supply others tend to restrict it

Elasticityoflaboursupply
Wage

Market supply of labour for relatively

low-skilled jobs examples ..

LS1

Quantity of labour

Elasticityoflaboursupply
Wage

Market supply of labour for relatively

high skilled jobs with restricted entry
LS2

Quantity of labour

Reservationwage
Wage

Minimum wage rate / salary level required

to attract workers into an industry

the reservation wage

is the lowest wage
rate at which a
worker would be
willing to accept a
particular type of job

Quantity of labour

Theindividuallaboursupplycurve
Builtaroundtheprincipleoftheworkleisure
tradeoff
Ifwagesarehigher,willpeoplesupplymoreof
theirtimetowork?
Whataretheincentives?
Considertheopportunitycostofnotworking
Dotargetincomesmatter?
Istheindividuallaboursupplycurvelikelytobe
linearaswageschange?

Possiblelaboursupplycurves
Wage

Hours worked

Canthesupplycurveslopebackwards?
Wage

Hours worked

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Incomeandsubstitutioneffectsfrom
higherwages
Incomeeffects:
Takeslesstimeworking
less time working
Takes
toachievethesame
amountofincome
Incomeelasticityof
demandforleisuretime
Willsomepeoplecut
back on their hours
backontheirhours
havingreacheda
satisfactorytarget
income?

Incomeandsubstitutioneffectsfrom
higherwages
Incomeeffects:

Substitutioneffects:

Takeslesstimeworking
less time working
Takes
toachievethesame
amountofincome

Theopportunitycostof
opportunity cost of
The
takingleisuretimehas
risen(why?)

Doesleisurehaveahigh
incomeelasticityof
demand?

Thereturnsfrom
workinghaveincreased

Will some people cut

Willsomepeoplecut
backontheirhours
havingreacheda
satisfactorytarget
income?

Anincentivetowork
longerhours?
longer hours?

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NewYorkTaxiexample
Whathappens
whenthe
minimumfare
fortaxidriversis
increased?

These taxi drivers lease their cabs

for a fixed period (e.g. A month or
year). They are responsible for fuel
and maintenance and keep 100% of
their fare income after paying their
fixed costs)

Assumethat
taxidriversset
anearnings
targetover
someshorttime
horizon

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