3.5.2 Supply of labour – Edexcel Economics A notes

Contents

What determines labour supply?

Labour supply is the amount of labour workers are willing and able to supply (within a given time period).

What determines labour supply in a particular industry?

• Wage
  • Higher hourly wages increase the opportunity cost of leisure time. In other words, for each hour of free time, the worker gives up a higher wage. This creates an incentive for workers to switch away from leisure and towards supplying labour. This is known as the “substitution effect.”
    • However, higher wages also create an “income effect.” Workers can earn the same income with fewer hours and instead enjoy more leisure time. In this case, higher wages could reduce labour supply.
    • Also some workers are motivated to work by non-monetary factors instead (see below). This would mean changes in wages have less of an effect on labour supply.
  • A change in wage leads to a movement along the labour supply curve.
• Wages in other jobs.
  • A higher wage in another occupation may incentivise workers to switch away from their current occupation to another occupation.
  • This could also occur due to wage rises in other countries. See the example below on doctors moving out of the UK and working abroad instead.
• Non-wage benefits to jobs.
  • This can include monetary factors not part of the wage, for example bonuses.
  • But also non-monetary factors such as holiday pay, sick pay, working hours, whether the work is flexible, and so on.
  • Higher bonuses, greater holiday pay or reduced working hours for a given wage could all increase the incentive to work, increasing labour supply.
• Changes to income tax or welfare benefits.
  • A rise in income tax rates reduces the monetary benefit from working for workers. Workers would take home a lesser amount each month for a given pre-tax wage.
  • This reduces labour supply.
  • A rise in welfare benefits may reduce incentives to work or find work. In this scenario, workers may not gain much disposable income from choosing to work compared to not working.
• The barriers to entry to a profession (amount of training required to be qualified to work):
  • The longer it takes to train for a particular occupation, the harder it will be to enter the labour supply. Therefore labour supply will be low.
  • For example, doctors requiring ten years of total training (including their undergraduate degree) to become a GP.
• Participation rate
  • The participation rate measures the fraction of the working age population that is part of the labour force.
  • A lower participation rate would reduce labour supply.
  • Since the Covid-19 pandemic, policymakers have been concerned about a low participation rate, or conversely, high “economic inactivity.“
  • There can be lots of reasons for people being of working age but not working. This could include students, carers, parents raising children, those who have retired as well as those with health difficulties preventing work. It follows that not all so-called “economic inactivity” is a bad thing.
  • Yet economic inactivity could also include people who have given up looking for work.
  • Government policy can influence the participation rate. This could include government policies on healthcare, welfare payments, and support for those who have been without a job for a long time period.
  • Changes to pension entitlement can affect labour supply. For example, if the retirement age is raised, workers may need to stay at work longer to secure their pension in full.
  • If pensions from working become more generous, it becomes easier for workers to save enough funds in their pension to retire early. However a more generous pension could increase the incentive to work, raising labour supply.
• Demographic changes
  • An increase in net migration into the country could increase labour supply.
  • However an aging population could mean more workers leaving the labour force due to retirement, while fewer workers enter the labour force. This could reduce labour supply over time.
• Mobility of labour
  • Some workers may be occupationally immobile. This means they cannot switch easily between different occupations owing to a lack of skills.
  • Labour can also be geographically immobile. It can be difficult to move to a new region for work, when there are family ties or high house prices preventing worker relocation.
    • However the government can intervene to reduce immobility of labour. For instance, the government could create training schemes to teach workers new skills. This could reduce occupational immobility.
    • Firms could also fund worker training to reduce occupational immobility of labour.

Labour supply diagram

The labour market supply curve is typically upward sloping.

A higher wage increases the incentive work, leading to higher labour supply. This is shown as a movement along the labour supply curve.

Changes in other factors, such as non-wage benefits, demographic changes, and changes to wages in other occupations, will shift the labour supply curve.

Case study: NHS doctors

• Doctors are primarily employed by the National Health Service (NHS) in the UK, although there are also private practices.
• The NHS is facing challenges holding onto doctors, with reports of NHS doctors moving abroad, for example to Australia, New Zealand or the Middle East. The reasons given for moving abroad include higher pay and better working conditions in destination countries.
• Some areas of the UK struggle to access GPs. For instance in Thurrock and Leicester there are over 3000 patients per GP, well above the national average.
• The wage elasticity of labour supply for doctors is inelastic.
• It can take about ten years to train a General Practitioner (GP) – five years of medical school, two ‘foundation’ years and three years of GP training.

What determines the wage elasticity of labour supply?

The wage elasticity of labour supply (WES) measures the responsiveness of labour supply to changes in wages.

Which factors influence the WES for an occupation?

• The rate of unemployment
  • A higher rate of unemployment means there is more spare capacity in the labour market.
  • So, if wages rise in a particular occupation, there are more unemployed who may retrain to work in that occupation.
  • This will make labour supply more responsive (elastic) when wages change.
• The degree of labour mobility
  • Occupational immobility of labour means workers lack the skills to switch to a different occupation.
  • So if wages rise, the presence of occupational immobility means fewer workers can switch into that profession.
  • This makes labour supply more inelastic with respect to wages.
• Time frame
  • In the short run, workers may not have had time to respond fully to wage rises. So labour supply is wage-inelastic.
  • However in the long run, workers have the time to move to new sectors or retrain, so labour supply becomes more wage-elastic.
• Skill or qualification requirements for the job
  • Some jobs may require qualifications from their workers, such as doctors.
  • When wages rise, qualification requirements make it more difficult for workers to enter into an occupation. So labour supply is more wage-inelastic.
• Importance of non-monetary benefits relative to wages
  • Some workers choose their professions for non-monetary benefits, such as lower working hours or the feeling of making a difference.
  • Such workers may be less responsive in their labour supply to changes in wages.
• Immigration policy
  • Suppose the government makes it more difficult for immigrants to enter the country. For instance with more restrictive visa requirements.
  • Then labour supply becomes more inelastic in response to changes in wages, as fewer immigrants can enter the country when wages rise.

Note that some of the determinants of labour supply, such as immobility of labour, also influence the wage elasticity of labour supply.

Practice question in the style of Edexcel Economics A on labour supply

This is an essay question written in the style of Edexcel Economics A.

First there is a short extract, followed by the question.

Extract

It can take a long time to train doctors to work in the NHS. For example, it can take about ten years to train a General Practitioner (GP) in the UK. This includes five years of medical school, two ‘foundation’ years and three years of GP training. Some areas of the UK struggle to access GPs. For instance in Thurrock and Leicester there are over 3000 patients per GP.

Question

Explain how labour immobility influences the labour supply for General Practitioners. (15 marks).

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