Economics (9640) | The supply of labour to different labour markets

💰 The Supply of Labour to Different Labour Markets 👷‍♀️

Welcome to this important chapter! When we studied demand for labour, we looked at what firms want. Now, we flip the coin and look at the perspective of the worker. This section explains what motivates people to offer their time and skills, and how the total supply of workers changes in specific job markets. Understanding this concept is essential for explaining why some jobs pay high wages and others pay less!

1. Defining the Supply of Labour

The supply of labour refers to the total number of hours workers are willing and able to offer for employment at a given wage rate in a particular occupation or industry.

Crucially, when we study the supply of labour in this context, we usually focus on the supply to a specific market (e.g., the market for software engineers) rather than the supply of labour for the whole country.

Key Takeaway: Ability and Willingness

Supply of labour needs two things:

• Ability: Do workers possess the necessary qualifications, skills, and health?
• Willingness: Are they motivated by the wage and working conditions to actually take the job?

2. Factors Influencing Labour Supply (The Monetary Side)

The decision for a worker to join a specific labour market is influenced by many factors. These factors determine the height and shape of the supply curve for that job. We categorize them into monetary (wage-related) and non-monetary (non-wage-related) considerations.

Monetary Considerations (The Main Incentive)

The most direct influence on the supply of labour to any market is the wage rate itself.

1. The Wage Rate:

In a specific labour market, as the wage rate increases, more people are generally willing and able to work in that occupation. This is why the market supply curve for labour is typically upward sloping.

• Example: If the salary for being a plumber suddenly doubled, people currently working in less well-paid, similar jobs (like general construction) might retrain and switch occupations, increasing the supply of plumbers.

2. Other Financial Rewards:

It's not just the basic hourly wage. Workers consider the entire package of financial benefits:

• Bonuses and Commission: Extra payments linked to performance.
• Pension Schemes: The quality and size of future retirement payments.
• Fringe Benefits: Financial perks like company cars, subsidised housing, or free health insurance.

Quick Review: The higher the total financial reward (wages + benefits), the greater the incentive for workers to join that market, increasing supply.

3. Factors Influencing Labour Supply (The Non-Monetary Side)

Not everything is about money. Non-monetary considerations often play a huge role in career choices, particularly when comparing two jobs with similar pay.

1. Working Conditions:

If a job has unpleasant, dangerous, or excessively stressful conditions, the supply of labour will be lower unless the pay is high enough to compensate.

• Analogy: Why do miners or deep-sea fishermen often earn high wages? Because they receive a compensating wage differential—extra pay needed to compensate for poor working conditions, making the job attractive enough to ensure sufficient supply.

2. Job Satisfaction and Enjoyment:

Jobs that are highly rewarding psychologically (e.g., teaching, nursing, charity work) might attract a large supply of labour even if the wages are not the highest. High job satisfaction acts as a "non-monetary reward."

3. Training and Qualification Requirements:

Jobs requiring long, expensive training (like doctors or specialised lawyers) will naturally have a lower current supply of labour because there are high barriers to entry. The supply will increase only if the wages are high enough to justify the initial investment in education and the years spent training.

4. Job Security and Future Prospects:

A job offering high stability (like public sector employment) or excellent career progression is more attractive than one with high risks or a dead-end future, boosting the supply.

5. Geographical Mobility:

If a job is only available in a few remote locations, workers must be willing to relocate, which can reduce supply unless wages compensate for the relocation cost or inconvenience.

Did you know? The desire for a better work-life balance is a major non-monetary factor that affects labour supply today, often leading workers to choose flexible hours over high pay.

4. The Market Supply Curve for Labour

The supply curve for labour (S) illustrates the relationship between the wage rate (W) and the quantity of labour supplied (Q) in a specific market, assuming all other factors are constant (

ceteris paribus

).

The Upward Slope

The market supply curve slopes upwards from left to right. This indicates a positive relationship:

• If the wage rate increases (W to W1), the quantity of labour supplied increases (Q to Q1).
• If the wage rate decreases, the quantity supplied decreases.

Why is it upward sloping?

Higher wages attract more workers from:

1. Substitute Occupations: Workers move out of lower-paid jobs and into this occupation.
2. Inactivity: Individuals previously unemployed or not seeking work (e.g., students, retired people) are drawn back into the labour force by the higher wage.

Note: The syllabus specifically states you do not need to understand the determinants of an individual's supply curve (the one that bends backwards at high wages). You only need to focus on the upward sloping market curve.

5. Causes of Shifts in the Market Supply Curve

A change in the wage rate causes a movement along the supply curve (from one point to another). However, a change in any of the non-wage factors will cause the entire curve to shift.

Shifts to the Right (S increases)

A shift to the right means that more labour is supplied at every given wage rate. This happens if the occupation becomes relatively more attractive due to non-wage factors.

• Decrease in Training Required: If a new technology means the training time for a job (e.g., software coding) is cut in half, the supply of qualified workers increases.
• Improved Non-Monetary Benefits: Working conditions improve (e.g., better safety records, more flexible working hours).
• Increase in Relevant Population/Migration: An increase in the working-age population or an increase in net immigration of people with the required skills.
• Wages in Substitute Jobs Fall: If wages in alternative jobs fall, the occupation we are studying becomes relatively more attractive.

Shifts to the Left (S decreases)

A shift to the left means that less labour is supplied at every given wage rate. This happens if the occupation becomes relatively less attractive.

• Deteriorating Working Conditions: The job becomes more dangerous or stressful.
• Higher Barriers to Entry: New legislation requires more qualifications or licenses to practice the profession.
• Wages in Substitute Jobs Rise: Alternative occupations now offer better pay, leading workers to leave the current market.
• Demographic Changes: An ageing population means fewer young people are entering the workforce to replace those retiring.

6. Supply of Labour and Wage Differentials

Understanding labour supply is vital for explaining wage differentials (why different jobs pay different amounts).

For two markets with identical demand for labour, the one with a lower supply will have a higher equilibrium wage rate.

• Example: The supply of brain surgeons is very low because the non-monetary cost (time, stress, immense training required) is extremely high. To attract the small number of people who are able to do the job, the wage must be extremely high.
• Example: The supply of retail workers is very high (low training barriers, high numbers of people able to do the job). Thus, the equilibrium wage rate is typically lower.

This demonstrates how monetary and non-monetary considerations constantly interact to determine the quantity of labour supplied to any specific market.