Supply of labour

Supply of labour

The supply of labour is the amount of workers that are willing and able to offer their services at a given wage rate over a particular time period.

Factors influencing the supply of labour
Real wage rate
The real wage rate is obtained by dividing the nominal wage by the price level. It indicates what the nominal wage can buy. The higher the real wage the greater the number of workers who will offer themselves for employment. If the real wage rate goes down as a result of the rising inflation rate, fewer workers would be willing to work because the existing wage rate can buy lesser goods or services.

Non-monetary rewards
Jobs that have benefits, other than the wages, attract more people; the supply of labour for such jobs will increase even though the wage rate is low. The benefits include health insurance, the opportunity for career advancement, growth prospects, good pension, job security, free accommodation, the opportunity to travel abroad, etc. 

Nature of the job
Fewer people go into occupations that have more risks or require working long hours. Consequently, the supply of labour remains low for these kinds of jobs. The number of accidents or fatalities may be high, thereby discouraging a lot of people from taking up such jobs,e.g. pilots, roofers, extraction workers, steelworkers, etc.

Net migration
The labour supply will shrink if the number of people leaving the country is more than the number of people coming into it (net emigration). If the number of immigrants exceeds the number of emigrants (net immigration), more people will be available for work.

Income tax rate and unemployment benefits
Tax can be a disincentive to work because a high tax rate reduces the number of hours individuals are willing to offer to employers while a low-income tax rate encourages the supply of labour as more people will be encouraged to join the labour force. A fall in benefits paid to jobseekers has encouraged more people to look for work. However, the rise in allowances to the unemployed will reduce the number of those willing to join the labour force.

The supply of labour curve for an individual worker

The supply curve for the individual shows the number of hours an individual is willing and able to offer to employers at a particular wage rate. It is backward bending due to the interaction of both the substitution effect and income effect. The opportunity cost of work is leisure foregone. And work is the opportunity cost of leisure. If the wage rate is increased the worker who is on low income will increase the number of hours worked and reduce his leisure. By so doing his/her total earnings (wage rate multiplied by the hours worked) will increase. He, therefore, replaces leisure with work; this is the substitution effect. From Figure 1 below, if the wage rate increases from w1 to w2, the number of hours worked rises from n1 to n2 and an upward sloping supply curve is produced.

When a worker is on a high income, he would cut back on the hours worked if the wage rate is increased because he will eventually make the same or more income. This is known as the income effect. If the wage rate jumps from w3 to w4, the number of hours worked declines from n3 to n4, thereby producing a downward sloping supply curve (Figure 1 below). As the substitution effect is stronger than the income effect at low earnings, workers continue to substitute leisure with work because going on leisure is costly. For high-income earners, the income effect is stronger so they cut back on hours worked once the wage rate is raised.

Figure 1: The supply curve for an individual

Demand curve for an individual

Supply of labour for the firm and industry
The supply of labour for a firm is determined by the structure of the market in which it operates. The supply of labour for a perfectly competitive market with many firms and workers and one ruling wage rate is perfectly elastic or horizontal in nature (Figure 2 below). The supply of labour for the industry in a perfect labour market is upward sloping as it cannot be influenced by any individual firm (Figure 3 below). This means that supply increases in response to increases in the wage rate.


Figure 2: The supply of labour curve for a firm

Supply of labour for a firm

 

In an imperfect market where there may be only one major employer of labour, the firm’s supply curve is upward sloping like for the industry in a perfect labour market.  


Figure 3: The supply of labour curve for an industry

Graph showing supply of labour for an industry