Supply of labour (3.5.2)

Define the term ‘Labour supply’

The quantity of labour that are willing and able to work at a given wage rate and time period.

Explain the relationship between the supply for labour and wage rate

There is a positive relationship between wage rate and quantity supplied of labour. This is because higher wages creates an incentive for people to work as they realise there is an opportunity cost by staying at home and not working to gain an income.

How does migration influence the supply of labour?

Migration: An increase in net-inwards migration will increase the supply of labour. This is because there is a larger pool of available labour who are willing and able to work.

How do unemployment benefits influence the supply of labour?

If the government lowers the amount of unemployment benefits, this creates an incentive for the economically inactive to seek out and find work. This is because the unemployed worker can no longer rely on benefits and now has less disposable income to spend on basic necessities. This creates an opportunity cost, as by staying at home workers are foregoing income that would’ve been earned at work. This means that they have no choice but to enter the labour market and offer their supply in order to gain an income. This increases the supply of labour.

How does income tax influence the supply of labour?

An increase in income tax means that workers are unable to keep a large proportion of the income they gained from working. As a result, they may have less incentive to work for lower real wages. Therefore, the supply of labour decreases.

BUT: Workers need to gain a certain amount of income to pay off basic necessities such as food, shelter or paying off a monthly mortgage. As a result, they may choose to work more hours for the same amount of income post tax which actually may increase labour supply.

How do non-pecuniary benefits influence the supply of labour?

Non-pecuniary benefits: Benefits of a job other than the money you’re paid. An increase in non-pecuniary benefits such as free food vouchers makes jobs more appealing to individuals. This means that workers are more willing and able to supply their labour, increasing labour supply.

How does education and training influence the supply of labour?

Education & Training: An increase in education and training means that there are more individuals with the required qualifications to enter a particular profession. This means they are more able to supply their labour, leading to an increase in labour supply.

Also, if workers undertake training in a particular occupation, they obtain greater skills which will improve productivity as each worker is able to produce more goods and services. Therefore, the demand for labour will increase since it is influenced by the worker’s marginal revenue product (MRP) which is the extra revenue generated when an additional worker is employed. An increase in MRP can make it more efficient for firms to use workers to produce their good/services than it is to use capital since the ACL is spread along more units of output, increasing firms profits.

However, if workers become more productive and each can produce more goods and services, firms may reduce the demand for labour because they need fewer workers to produce the goods/services they need and it is an effective way to cut the marginal cost of labour.

How does occupational immobility lead to labour market failure?

When workers can’t move between different jobs because they lack the skills needed. This leads to structural unemployment, which is when it is caused by a shift in an industry. This means that recourses cannot be allocated efficiently as capable and hardworking individuals are unemployed and their skills are being wasted, making it an example of labour market failure.

How does geographical immobility lead to labour market failure?

When workers struggle to move between different areas. This leads to unemployment as workers can’t move to fill jobs. This means that recourses cannot be allocated efficiently as capable and hardworking individuals are unemployed and their skills are being wasted, making it an example of labour market failure.

Reasons and interventions for labour immobility.

Reasons: Geographical

• Search costs - Time and effort needed to seek

• Availability and cost of housing - London (£2100), Manchester (£900)

• Visa restrictions

• Poor infrastructure

Reasons: Occupational

• Modernisation / Sectoral Transitions → Economy shifts from primary → Secondary → Tertiary sectors, creating demand for new skills → occupational immobility for current workers → Structural unemployment

• Education system → Schools & training programmes fail to supply the skills needed for emerging jobs → Occupational long-term immobility → Structural unemployment

• Technological advancements

Interventions: Geographical

• Improve transport

• Relocation subsidy

Interventions: Occupational

• Apprenticeship subsidy