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The Supply for Labour

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Economics

Have you thought of what happens when you are looking for a job or getting a job? What do all the millions of people working around the world mean in terms of Economics? When you decide to join a company or simply look for a job, you contribute to labour.

The supply for labour consists of workers that are willing to work or already working. There are many dynamics around labour supply. There is movement along the labour supply curve that usually occurs due to the wage change, and there are also shifts of the labour supply curve caused by external factors. In this explanation, you will learn everything about labour supply and factors that affect the supply for labour.

What is the supply for labour?

Labour supply refers to individuals’ decisions with regards to how much of their labour to supply in the labour market. In economics, we refer to the rest of the hours that aren’t work hours as leisure. An individual will choose how many hours they want to dedicate to work and how many to leisure depending on their individual preferences.

The supply of labour refers to the number of hours a worker is willing and able to work in a given period.

Note that labour supply does not mean the number of workers employed in the industry. A typical labour supply curve would show how much labour a particular worker is willing and able to supply at different wage rates.

Supply for labour graph

We can illustrate the basic concept of the supply of labour in the form of a diagram as in the figure below.

The supply for labour Labour supply curve StudySmarterFigure 1. The labour supply curve - StudySmarter.

Figure 1 illustrates the number of hours a worker is willing and able to supply at a given wage rate. In the figure you can see that the curve is upward sloping for any form of industry. If wages in a particular industry were to rise, more workers would try to work in that industry because they would be attracted by the high wages: the incentive would be receiving more money. For example, if the wage rate were to rise from W1 to W2 in a certain industry, then it would lead to an increase in employment levels in that certain industry from E1 to E2. The extent to which the labour supply would increase from E1 to E2, however, depends on the elasticity of the supply of labour.

An individual’s supply of labour

The supply for labour curve shows the number of hours of labour a worker is willing to supply. Let’s apply this concept to a real-life example. Remember that the worker is supplying the hours of labour at different hourly wages. Figure 2 shows the impact a change in wage has on the number of hours supplied by an individual worker.

The supply for labour Supply of Labour StudySmarter

Figure 2. Effect of a wage increase on the supply of labour - StudySmarter.

In figure 2 you can see that the x-axis is labelled as the ‘quantity of labour’ in terms of hours of labour per week. On the y-axis, you can see the hourly wage rate, the amount of money an individual worker receives per hour worked.

If the wage rate per hour were to increase from £6 to £11 due to upper management decisions, then this would increase the number of hours an individual is willing and able to supply from 27 hours per week to 39 hours per week; a 12-hour increase. The individual was initially situated at point A in the labour supply diagram but after the wage increase, the position moved to point B.

The supply for labour effects

There are two effects associated with the labour supply, namely substitution effect and income effect.

The substitution effect

There are two ways in which you spend your time, either working or doing leisure activities. With an increase in the wage rate, working becomes much more attractive than spending your time in leisure activities. As a result, you will choose to substitute your leisure activities for more hours of work.

The income effect

The income effect states that when there is an increase in the hourly wage rates, there will be an increase in the real income. If we consider ‘leisure’ to be a normal good, then the effect an income increase would have is that the demand for leisure would increase, which would lead to a reduction in the quantity of labour supplied.

Factors affecting the supply of labour

There are two main factors when considering the supply of labour: monetary and non-monetary factors. We will go over both of them by explaining the concept of net advantage.

The standard supply for labour curve suggests that the worker supplies more labour to increase private economic benefit or personal economic welfare. The welfare that is derived from the supply of labour is divided into two: the monetary and non-monetary factors when combined make up the net advantage.

Monetary factors refer to the utility derived from wages whereas non-monetary factors refer to the utility derived from other aspects of working such as job satisfaction (could also be job dissatisfaction, office atmosphere, feelings about the workplace, etc.)

The choice the individual worker makes in selecting the right job is dependent on the net advantage derived from the chosen occupations. Non-monetary factors, however, usually change slower than monetary ones. An increase in the wage of a certain occupation should lead to an increase in the supply of labour as it increases the net advantage of that certain job in comparison to others.

To summarise, the net advantage is the sum of the utility derived from receiving a wage as well as the utility derived from working in that certain occupation.

Work that involves heavier labour, more routine, and even more hours such as in an assembly line, factory, or coal mine will inevitably yield more job dissatisfaction for the average individual worker. In such scenarios, the supply of labour must be compensated with a relatively satisfactory and proper hourly wage rate to compensate for the conditions of such occupations.

Shifts in the market supply curve of labour

We have already established some factors that influence the supply of labour in the labour market: monetary (wages) and non-monetary factors. The important ones include improvements in working conditions, job satisfaction, job security, and holiday entitlement. An improvement of such factors will lead to a shift to the right in the supply for the labour curve and a deterioration of these factors will lead to a shift to the left.

In addition, a change in attitude towards leisure as well as work will influence the supply curve for the labour market. For example, if an individual worker values leisure more than work, then we will see that the worker works fewer hours at the given wage rate and the supply for labour curve will shift to the left.

There are many factors that could shift the labour supply curve. The three main ones are changes in income, expectations, and populations.

Changes in income

Changes in income can shift the supply curve in two ways, either to the left or to the right depending on whether an individual considers leisure activities to be a normal or inferior good. If an individual considers the leisure activity to be a normal good, then an increase in income would increase the demand for leisure, but shift the supply of labour to the left, as labour is now being substituted with leisure.

On the other hand, if an individual considers leisure activities inferior goods, an increase in their income would lower the demand for leisure and shift the supply of labour to the right, where they supply more labour.

Changes in populations

An increase in the population such as immigration could increase the supply for labour and thus shift the labour supply curve to the right. A reduction of the population, on the other hand, would reduce the supply of labour and the overall labour force, and cause the labour supply curve to shift to the left.

In addition, a fall in the number of people that are eligible for work (before going to retirement) will also cause the supply for labour to reduce. This scenario could be offset by people who are still going to be in the workforce who have reached retirement age deciding to work longer to finance their retirement.

Changes in expectations

If the people of the older generations have poor expectations of their future pensions such as receiving a lower amount of money than expected, we can expect them to stay longer in the workforce and thus increase the supply of labour in the labour market. On the other hand, a rise in the proportion of people in higher education tend to reduce the supply of labour.

The elasticity of labour supply

The elasticity of supply of labour measures the proportionate change in the supply of labour when there is a change in the wage rates.

Below are the factors that influence the elasticity of the supply of labour.

  1. The skills someone has at hand can influence the elasticity of the labour supply. Unskilled workers' elasticity of supply tends to be more elastic than those that possess specific skills and training. Think about how an increase in the wage of unskilled labour would significantly increase the number of people willing to work. However, an increase in wage in an industry like AI would not generate a higher labour supply. Individuals need severe training and education to supply their labour in AI. Hence, the supply is more inelastic.
  2. External factors that reduce the occupational and geographical positions and mobilities of labour such as having the workplace far away from the worker's place of stay (different city, council, state, etc.) tend to reduce the elasticity of the supply for labour.
  3. The supply of labour is more elastic in the long run than it is in the short run. That's because workers in the long run have the time to seek new jobs, learn new skills, and adjust to the changes in the labour market.

Take a firm that wishes to increase its size and expand into the market. They currently have 1000 workers available and pay them £10 per hour. They have now decided to increase the wage from £10 to £15, which has led 500 new workers to apply for the jobs offered.

Calculate the wage elasticity of supply for labour:

To do so, we are going to use the following formulae:

(WESL stands for wage elasticity of supply for labour)

By using this formula we get the following result when applying for the numbers in our example:

The wage elasticity of supply for labour here is unitary as it is equal to 1. This means that there’s a proportional increase in the labour supply when there's 1 unit of increase in wage.

Now that you’ve familiarised yourself with the supply for labour, test your knowledge using the flashcards.

The Supply for Labour - Key takeaways

  • The supply for labour is the number of hours a worker is willing and able to work in a given time period.
  • The supply for labour curve shows the number of hours of labour the worker is willing to supply.
  • Individual labour supply is determined by income and substitution effects.
  • The welfare derived from the supply of labour is divided into two parts: the monetary and non-monetary factors, that when combined make up the net advantage.
  • There are three main factors affecting the supply of labour: changes in income, expectations, and population.
  • The elasticity of supply of labour measures the proportionate change in the supply of labour when there is a change in the wage rate.

The Supply for Labour

The supply for labour mainly refers to the number of hours a worker is willing and able to work in a given period. It’s not the same as the number of workers.

By having examined the effects of a possible wage rate increase about the number of hours of labour a worker is willing and able to supply, we can conclude that when there is an increase in the wage, there will also be an increase in the number of hours of labour the worker is willing and able to supply and vice versa.

Different types of occupations will result in workers having different amounts of positive or negative utility (or private welfare) derived from these occupations. These include job satisfaction and job dissatisfaction. If, for example, the worker enjoys the occupation and there is high job satisfaction, the net advantage derived from work is greater than the utility that is derived from the wages.


Net advantage includes various benefits to the individual work such as job benefits, the possibility for promotion, job security, good working conditions, holiday entitlement, and more psychological benefits as discussed in the previous paragraphs. An improvement in such benefits will lead to a shift in the labour supply.

Because the wage rise in one industry is relative to another wage rise in a different industry. Because of that workers will shift their labour to the high-wage industry.

Final The Supply for Labour Quiz

Question

Define the supply of labour.

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Answer

The supply of labour is the number of hours a worker is willing and able to work in a given time period.

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Question

What does an individual's labour supply curve show?

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Answer

The labour supply curve shows the number of hours of labour the worker is willing to supply.

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Question

What are the effects associated with labour supply?

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Answer

The substitution effect and the income effect.

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Question

Explain the substitution effect.

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Answer

There are two ways in which you spend your time: either working or doing leisure activities. With an increase in the wage rate, working becomes much more attractive than spending your time in leisure activities. As a result, you will choose to substitute your leisure activities for more hours of work.

Show question

Question

What are two main ways an individual can consider leisure?

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Answer

A normal good and an inferior good.


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Question

What happens to the supply for labour when there's an increase in income and the individual considers leisure to be a normal good?

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Answer

The demand for leisure would increase, which would result to a fall in the supply for labor.

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Question

What are the two main factors that affect the supply for labour?

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Answer

Monetary and non-monetary factors. 

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Question

Explain monetary factors in the context of supply for labour.

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Answer

Monetary factors refer to the utility derived from wages. That is to say, how much satisfaction earning a high income brings to an individual.

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Question

Explain non-monetary factors in the context of the supply for labour.

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Answer

Non-monetary factors refer to the utility derived from other aspects of working such as job satisfaction (could also be job dissatisfaction,  office atmosphere, feelings within the workplace, etc.)


Show question

Question

Explain net advantage.

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Answer

The net advantage is the sum of the utility derived from receiving a wage as well as the utility derived from working in that certain occupation.

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Question

What factors cause a shift in the supply for labour?

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Answer

Changes in income

Changes in population

Changes in expectations

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Question

Explain how a change in income shifts the supply for labour. 

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Answer

Changes in income can shift the supply curve in two ways, either to the left or to the right depending on whether an individual considers leisure activities to be a normal or inferior good. If an individual considers the leisure activity to be a normal good, then an increase in income would increase the demand for leisure but shift the supply of labour to the left, as labour is now being substituted with leisure. 


On the other hand, if you have an individual that considers leisure activities to be inferior goods, an increase in their income would lower the demand for leisure and shift the supply of labor to the right, where they supply more labor.

Show question

Question

Explain how a change in population shifts the supply for labour.

Show answer

Answer

An increase in the population such as immigration could increase the supply for labour and thus shift the labour supply curve to the right. A reduction of the population on the other hand would reduce the supply of labour and the overall labour force and cause the labour supply curve to shift to the left.

Show question

Question

Explain how a change in future expectations shifts the supply for labour.

Show answer

Answer

If the people of the older generations have poor expectations of their future pensions such as receiving a lower amount of money than expected, we can expect them to stay longer in the workforce and thus increase the supply of labour in the labour market. 

Show question

Question

What is the price elasticity of supply for labour?

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Answer

The elasticity of supply of labour measures the proportionate change in the supply of labor when there is a change in the wage rate.

Show question

Question

Two effects associated with the labour supply are ___________ and income effect 

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Answer

substitution effect

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Question

With an increase in the wage rate, working becomes much more attractive than spending your time in leisure activities.


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Answer

True

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Question

The income effect states that when there is an increase in the hourly wage rates, there will be an increase in the ___________. 

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real income 

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The supply of labour can be affected by ___________ and non-___________ factors. 

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Answer

monetary

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Monetary factors refer to the utility derived from ___________

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Answer

wages 

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Question

The choice the individual worker makes in selecting the right job is dependent on the ___________ derived from the chosen occupations. 


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Answer

net advantage 

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Question

the net advantage is the sum of the ___________ derived from receiving a wage as well as the ___________ derived from working


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Answer

utility, utility  

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Question

Improvements in working conditions, job satisfaction, job security, and holiday entitlement will shift the labour supply curve ___________

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to the right

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What can shift the labour supply curve?

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Answer

changes in income

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Question

An increase in the population such as immigration could ___________ the supply for labour and thus shift the labour supply curve to the right. 

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Answer

increase  

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Question

The elasticity of supply of labour measures the proportionate change in the supply of labour when there is a change in the ___________. 

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Answer

 wage rates 

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