Shifting Labour Supply
Definition
Labour supply: the number of hours workers are willing and able to offer to a firm or occupation at each wage rate over a given period.
Elasticity of labour supply: the responsiveness of the quantity of labour supplied to a change in the wage.
Elasticity of labour supply:
%ΔQL%ΔW \dfrac{\%\Delta Q_L}{\%\Delta W} %ΔW%ΔQL- The wage rate causes a movement along the curve, while non-wage determinants shift the whole curve.
- A rise in the wage makes the occupation more attractive, so the quantity of labour supplied rises.
- That response is shown as a movement up the existing supply curve, not as a shift.
Key Idea
- A movement along the curve follows only from a change in the wage.
- A shift of the curve follows from a change in a non-wage determinant.
Main Determinants
- A larger population or higher net migration increases the pool of available workers, shifting supply right.
- Lower income tax or lower out-of-work benefits raise the financial incentive to take a job, so more workers are offered.
- Fewer qualification or training barriers open an occupation to more workers.
- Better non-wage factors, such as improved working conditions or job satisfaction, attract more workers.
- Higher wages or better conditions in alternative occupations draw workers away and reduce supply.
- Supply to a single firm is more elastic than supply to a whole occupation, because workers switch firms more easily than they switch occupations.
Example
- Removing a costly licensing requirement for taxi drivers shifts the supply curve to the right.
- Cutting marginal income tax rates encourages more people to offer their labour, also shifting supply right.
Shifts Versus Movements
- Begin on a supply curve at a wage of £10 per hour with 1,000 hours supplied.
- If the wage rises to £12, the quantity supplied rises to 1,200 hours as a movement along the curve.
- If instead net migration rises while the wage stays at £10, the whole curve shifts right and more hours are offered at that same wage.
- Keeping the two cases apart is essential for drawing and labelling the diagram correctly.
Example
- The wage rises from £10 to £12 (+20%) and hours supplied rise from 1,000 to 1,200 (+20%).
- An elasticity of 1 makes this a unit-elastic movement, quite distinct from a migration inflow that shifts the curve so 1,300 hours are offered at an unchanged £10.
Exam technique
- State clearly which determinant has changed before you move the curve.
- Label a wage change as a movement and a determinant change as a shift.
Common Mistake
- Do not treat a wage change as a shift of the supply curve.
- Only non-wage determinants shift the curve, while the wage moves you along it.
Self review
- Define labour supply to an occupation.
- Name three non-wage determinants of labour supply.
- Calculate the elasticity of labour supply when a £10 to £12 wage rise raises hours from 1,000 to 1,200.
- Why is supply to a firm more elastic than supply to an occupation?
