Labor Supply

Mr. Way, Economics, 3/22/12

12.4.3 Discuss wage differences among jobs and professions, using the laws of demand and

supply and the concept of productivity.

What is the labor supply?

• It is the sum total of all the hours people are willing to provide for every wage level.

• In simple terms, the number of people who are willing and able to work.

• Labor supply can apply to the entire country, or a particular field.

Size of Labor Supply

• When there are very few people in the labor supply, those people can demand high wages for their labor, because they have no competition.

• When there are very many people in the labor supply, each person cannot ask for much because they’ll be out-bid by somebody willing to work for less.

Effects of Changes in Labor Supply

• As with any supply curve, increasing available supply will lower prices (wages) and increase quantity of hours worked.

• A decrease in supply will increase prices (wages), and decrease the quantity of hours worked.

Factors affecting labor supply

• Population size– Immigration/emigration– Birth rate– Death rate

• Retirement age

• Social programs for unemployed

• Cultural expectations

Calculating Price of Labor

• Employers want to maximize the profit they make from each worker,

• So they’ll only hire workers whose productivity is higher than their cost.

• Additionally, they will force workers to compete against each other to drive down the wage they have to pay.

• Wages are high for productive, scarce employees. Low for unproductive, plentiful ones.

Not all workers compete in the same market

• The labor market for rocket scientists usually doesn’t overlap much with the market for burger flippers.

• Highly “productive” workers usually only compete with other “productive” workers.

• “Wage-earners” generally only compete with other “wage earners.”

College and the myth of higher earning potential

• When studying social mobility, some researchers found that college graduates were more likely to move from poor to rich.

• Their conclusion was that in order to make everyone rich, we just need everyone to go to college.

• Their theory ignored a few important concepts:

College and the myth of higher earning potential

• They confused correlation and cause – was college making people successful, or was success making people go to college?

• Also, they ignored the laws of supply and demand.

• Increasing the number of college graduates drastically increased the labor supply for jobs requiring a degree

College and the myth of higher earning potential

• When so many people have degrees, they end up competing against so many others that the wage increase for a degree becomes tiny.

• If you go to college for money, make sure you pick a major that most people aren’t doing. Your classmates are your future competition.

• Pick a field that has a carefully limited supply, like doctor or lawyer.

Writing Prompt

• Do you think that the way we decide how wages are calculated is fair?

• Why do you think researchers (employed by universities) would promote the idea of college for everybody?

• Are you planning to go to college? What are you planning to study? How much will it cost you, and how much will it pay back?