O R I G I N A L LY S U B M I T T E D B Y:

Labor U M PA D , J E L
supply RIÑOS MIRAFLOR
D I M ATAWA R A N , R O D E L
C A S I P I T, J U D E L A
PA C TA O - I N , J A C K I E
What is Labor Supply?
 Labor supply refers to individuals’ decisions with regards to
how much of their labor to supply in the labor market.

 The framework that economists typically use to analyze

labor supply behavior is called the neoclassical model of
labor-leisure choice.
 This model isolates the factors that determine whether a
particular person works and, if so, how many hours she
chooses to work.
Example of a Labor Supply graph

 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.

Figure 1
 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 labor supply would increase
from E1 to E2, however, depends on the
elasticity of the supply of labor.

Figure 1
Labor supply curve

 The predicted relation between

hours of work and the wage rate is
called the labor supply curve.
 Remember that the worker is
supplying the hours of labor at
different hourly wages.
Figure 2 shows the impact a
change in wage has on the number
of hours supplied by an individual
worker.

Figure 2
Effect of a wage increase
on the supply of labor

The x-axis is labelled as the

‘quantity of labor’ in terms of hours
of labor per week. On the y-axis,
you can see the hourly wage rate,
the amount of money an individual
worker receives per hour worked.

Figure 2
Effect of a wage increase on the supply of labor
The wage rate per hour were increased
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 labor supply
diagram but after the wage increase, the
position moved to point B.
TWO EFFECTS OF LABOR SUPPLY
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
been that the demand for leisure
would increase, which would
lead to a reduction in the
quantity of labor supplied.
Factors affecting the
supply of labor
Two main factors when considering the supply of labor:
monetary and non-monetary factors.

Monetary factors Non-Monetary factors

 refer to the utility derived from wages refer to the utility derived from other
aspects of working such as job satisfaction,
Example: example;
1. Salary or Wages 1. Status
2. Bonus 2. Appreciation and recognition
3. Financial Incentives 3. Work-life balance
4. Promotion (monetary part) 4. Delegation
5. Profit Sharing 5. Working Condition
6. Stock Option 6. Job enrichment
7. Job security
Shifts in the Market
Supply Curve of
Labor
An increase in labor supply causes a
decrease in wage rate.
A decrease in labor supply causes an
increase in wage rate.
If the labor supply increases , then the
labor supply curve shifts to the right.
If the labor supply decreases, it shift to the
left.
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 labor to the left, as labor is now being
substituted with leisure.
Changes in Populations

An increase in the population such as

immigration could increase the supply for labor
and thus shift the labor supply curve to the right.
A reduction of the population, on the other hand,
would reduce the supply of labor and the overall
labor force, and cause the labor supply curve to
shift to the left.
 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 labor in the labor market. On the
other hand, a rise in the proportion of people in higher
education tend to reduce the supply of labor.
The Elasticity of Labor Supply

The elasticity of supply of labor measures the

proportionate change in the supply of labor when
there is a change in the wage rates.
There are three (3) factors that influence the
elasticity of the supply of labor.
1. The skills someone has at hand can influence the elasticity of the
labor supply. Unskilled workers' elasticity of supply tends to be
more elastic than those that possess specific skills and training.
2. External factors that reduce the occupational and geographical
positions and mobilities of labor 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 labor.
3. The supply of labor 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 labor market.
How to calculate wage elasticity of labor
supply:

WESL = % change in QLS

% change in Wage
Example

Take a firm that wishes to increase its size and

expand into the market. They currently have
1000 workers available and pay them P100 per
hour. They have now decided to increase the
wage from P100 to P150, which has led 500
new workers to apply for the jobs offer.
Solution
WESL = % change in QLS
% change in Wage

= 50%
50%

=1

or Q2 – Q1
Q1
W2 - W1
W1
1500 – 1000 = 0.5 or 50% 1
1000 =
=
150 - 100 =0.5 or 50%
100

Since the result is equal to 1, the supply of labor here is unitary elastic.
This means that there’s a proportional increase in the labor supply when there’s 1 unit of
increase in wage.

if the elasticity is zero, it is perfectly
inelastic.
If the elasticity is negative, it is
backward bending.
If the elasticity is positive and less
than 1, it is relativity inelastic.
If the elasticity is positive and more
than 1, it is relatively elastic.
References
Borjas G., (2016) Labor Economics 7th edition

Supply for Labour

: Meaning, Calculations & Graph (studysmarter.us)