The Short-run Supply Curve of Labour
- In the short-run, there’s insufficient time for workers to change occupation
- Therefore, the key influence in the short-run is the wage-rate.
- At low wages, a rise in the wage rate will cause a worker to work more hours (extension on the supply of labour)
- However, at a certain point, the offer of higher wages will cause a worker to work less hours (contraction in the supply of labour)
- This is because the worker thinks that their current income level meets their financial needs, and may be keen to have more hours for leisure.
- For example, a worker may currently work 40 hours at £30 per hour. A rise in the wage rate to £40 would enable the worker to earn the same amount by working 30 hours, giving the worker more leisure time
- This is called the backward-sloping labour supply curve
- This is the supply curve showing the substitution effect dominating at low wages and the income effect dominating at high wages
- The income effect is to reduce the number of hours people work
- The substitution effect increases the number of hours worked, as a higher wage rate increases the return on working, and so increases the opportunity cost of leisure, so the worker chooses to work.
- It is the income and substitution effects that the number of hours the worker wishes to work depends on the number of hours on offer and the relative importance that the worker attaches to income and leisure.
- Many workers, however, are not able to change how many hours they work, but as the labour market becomes more flexible, this choice is available to more workers