Friday, May 4, 2012

The Supply of Labour

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The Supply of Labour

The supply of labour is by definition ¡°the number of workers of more generally, the numbers of labour hours available to the economy¡±. The supply of labour can be established by a various number of both macroeconomic and microeconomic factors. First and foremost, is the wage factor which not only affects supply in different ways but will also affect other factors. The supplementary factors are preference of consumption versus leisure, institutional rigidities (i.e. trade unions and government legislations), the size and abilities of the adult population and additional factors such as sudden supply shocks.

Wage is a key factor in influencing the supply of labour in a number of ways, one of them being the change in wage rate; that is increases or decreases. The level of income offered by firms determines how willing workers are in supplying their labour. Generally speaking as the price rises it can be seen form the supply curve that quantity of supply also increases, this is known as the ¡°Substitution effect¡± ¨C increase in labour supplied with a rise in wage. From this we can obtain that as wage increases there is greater supply of labour. However, as incomes continue to increase past a certain point, workers are expected to consume more of everything including leisure. Therefore more leisure is consumed and level of supply decreases, this is known as the ¡°Income effect¡±. In general ¡°A rise in the wage rate leads to less leisure being consumed when the substitution effect is the dominant force, to more leisure consumed when the income effect is the dominant force.¡± Therefore it is clear that a change in the wage rate can determine the level of wage supplied and this idea is supported by the shape of the supply curve.

Another way wage can influence supply is if it slightly different than the expected wage. The agreed upon wage written in contracts is the nominal wage, when firms choose to pay workers an extra amount to encourage workers, this is known as the ¡°Efficiency wage¡±. This stabilizes or can increase the level of supply as workers would not feel the need to look for another job as they are unlikely to find a position paying more than their current wage. It may increase supply because as the level of wage offered is higher than necessary it attracts a sufficient number of workers and they will willingly increase their supply of labour. Furthermore, it encourages the workers to be more productive and therefore improving the quality of labour supplied.

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As mentioned above wages also affect other factors, the choice between leisure and consumption being one of them. Even though workers are the suppliers of labour, they make their working decisions in a manner similar to the way they make their buying decisions based on preferences and price. Along with that, when a person makes decision whether to work or not they have two possibilities leisure and consumption. If a person decides that they want leisure over work they will obviously work less, but this means they won¡¯t be able to afford consumption. Similarly, if a person chooses to consume, then they will work more in order to satisfy their wants to consume, but this means they will not have much leisure time. So the preference of a nation¡¯s general nature to either consume or repose can determine the level of labour supplied as a nation with an aggregate higher preference of consumption will mean a higher level of labour supplied in the market.

Trade unions and other types of employees associations can cause both positive and negative effects on the labour supplied. It can improve working conditions especially wage rates for its members, hence making work seem more attractive and therefore increasing the supply of labour. Or it can decrease the quantity of labour supplied by bargaining for a higher wage rate; as the raise in wages will decrease the level of demand for labour. This happens because as the price raise labour becomes more expensive, and when firms are not willing or prepared to pay the amount expected there will be a decrease in the demand for labour, causing subsequently an excess amount of supply that is unemployment. However, microeconomic factors such as, for example the ending of compulsory unionship for Myers would increase the supply of labour as there is no longer a restraint on the supply of labour.

Similarly to the wage rises caused by trade unions as a result of collective bargaining, government legislations such as the minimum wage policy also distorts the labour market, as it is effectively a price floor. When a minimum wage law is in effect, it forces wages to remain above the level that originally balanced supply and demand, reducing the quantity demanded and increasing the level of supply compared to the equilibrium level, and there is a surplus of labour. Subsequently because there are more workers willing to work than there are jobs, some workers become unemployed and minimum wages instead of raising the level of supply, decreases it. However this is not predominant reason for decreases in the supply of labour in the economy.

The size of the population is ostensibly important in determining the supply of labour. A country with population million and a participation rate of 100% would not have as much labour supplied as Australia with 0% participation rate. On the other hand however, if Australia¡¯s participation rate was 100% it would have higher supply of labour than the USA had their participation rate been only 5%. It is obvious then, that the participation rate is also important in determining the level of supply. In addition, countries with a more able and suitable majority of an age group would also provide more supply of labour as a bigger percentage of the population is able to provide their labour. Similarly a countries with more immigrants will gain more supplies of labour.

Other factors such as unexpected events will also affect supply. Unforeseen events affecting supply, though sometimes only temporarily, are called supply shocks. There are two types; beneficial and adverse. An adverse one is for example, the toppling of a stable government (such as the toppling over of Russia and Indonesia), disintegrating the economy in process and subsequently reducing the supply of labour. Another factor is a microeconomic one concerning the education, skills and experience required for certain areas of employment. Long apprenticeships to fulfill these required skills and education will also reduce supply of labour, because the acquisition of education skills and experience requires considerable time, sacrifice and effort leading to a lower supply of labour to those particular firms and industries that require a higher level of education, skills and experience.

A change in any of these factors would induce a change to the supply of labour. Changing the quality of the population for example will alter the potential supply of labour. In Australia any one over the age of 15 is a potential participant in the workforce, therefore a change in the birth rate (a decline) or an overly large percentage of very young or very old people will decrease the supply of labour as they are not suitable and are not allowed to supply labour (compulsory school retention age and compulsory retirement age). Changing social attitudes, especially towards working wives and mothers, along with better provisions of childcare and a decline in birth rate have increased the supply of labour, as it becomes more common for women to work, over the last twenty years.

In conclusion, although the supply of labour is less studied than demand as it is that which supply is born from, it is still an essential side of the economy with many economic issues and factors such as the wage rate, institutional rigidities, preference of consumption versus leisure which influences its functioning, quality and quantity. And it is an important part of the understanding of how the labour market functions.

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