LABOUR ELASTICITY OF SUPPLYA2 Economics

Aims and ObjectivesAim• Understand the elasticity of labour supply

Objectives:

• Define elasticity of supply in labour markets

• Explain the factors affecting supply to a firm.

• Analyse the determinants of elasticity of labour supply.

• Evaluate the ability of firms to influence the elasticity of supply.

Starter

• Changes in the UK/International labour supply.

• People changing career paths to ones they enjoy!

• http://www.youtube.com/watch?v=UKsi71iIgYo

The Supply of Labour to Specific Firms

• Discuss in groups what would influence your decision to choose employment at one specific firm as apposed to another in the same industry.

• What factors would you need to consider if deciding to work for House of Fraser or John Lewis?

The Supply of Labour to Specific Firms

Some factors influence the supply of labour to particular firms:

• Availability of Training: if a firm offers a higher quantity and quality of training than others, it is likely to attract more workers.

• Location: Firms based in cities will have a greater pool of labour to select from. Benefit from good transport links.

• Level of Unemployment: when the level of unemployment is low, there may be skills shortages making it difficult for firms to fill vacancies

• Opportunities to work overtime: to earn more money• http://www.youtube.com/watch?v=-WxX1YQVdlI

Industry Labour Supply Curve

Real Wage Rate

Quantity of Labour

Q1 Q2

W1

W2Higher Wage Rate

attracts more labour to the

market.

Elasticity of Supply• The responsiveness of the quantity of labour supplied to a

change in the real wage rate.• Vary from industry to industry.

Elasticity of Labour Supply=

Percentage change in quantity of labour supplied

Percentage change in wage rate

Elasticity Determinants• Discuss why each of these factors influences the elasticity

of the labour supply. Can you think of any more?

Skills and Qualifications

Length of Training Period

Sense of Vocation

Time Period

Skills and Qualifications• Jobs that require specific skills and qualifications will find

it more difficult to attract workers when the real wage rises since there will be few workers with relevant skills

• Elasticity tends to be lower for skilled jobs than for unskilled

Length of Training Period• Jobs with long training

periods will have low elasticities of labour supply, because workers may be put off by the length of the training period.

• Even if some workers are attracted by a higher wage rate, it may take several years to complete the required training.

Sense of Vocation• For teachers and nurses the reward is not solely financial.

• Supply may not change much to a change in the wage rate.

• These types of jobs will be largely inelastic.

• http://www.youtube.com/watch?v=xF3bc3cCI4Q

Time Period• In the long run supply of

labour will tend to be more elastic.

• This may be because certain occupations require a notice period

• However football managers do not!

Individuals Supply of Labour• At high wage levels an increase in the real wage rate will

actually lead to a reduction in hours of labour supplied.

• Can be shown on a backward bending labour supply curve.

Backward Bending Labour Supply Curve

Real Wage Rate

Hours Worked per Year

Q1 Q2

W1

W2

Substitution Effect +Income Effect +

Overall +

Substitution Effect +Income Effect -

Overall +

Substitution Effect +Income Effect -

Overall -

Effect on hours worked as real wage rate rises

Individuals Supply of Labour• The effects of a change in the wage rate can be divided

into two aspects.

Substitution Effect• If wages rise, leisure becomes relatively more expensive

(it has a higher opportunity cost).• There is a tendency to substitute extra hours of work,

replacing hours of leisure.

Substitution Effect

Income Effect

Individuals Supply of Labour

Income Effect• If a workers wages rise the workers income at current

hours worked rises.• This may encourage more work.• Alternatively the individual may now decide they can

afford more leisure time whilst maintaining a level of income.

• Summing the income and substitution effect gives the overall effect (wage effect).

Plenary: Discussion

•Can firms/ organisations/ governments influence or alter the elasticity of the labour supply in a given industry?

•Critique the backward bending labour supply curve.