Lectures_micro / Microeconomics_presentation_Chapter_20
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The Supply of Labor
Decisions about labor supply result from decisions about time allocation: how many hours to spend on different activities.
Leisure is time available for purposes other than earning money to buy marketed goods.
In the following graph, the individual labor supply curve shows how the quantity of labor supplied by an individual depends on that individual’s wage rate.
The Supply of Labor
A rise in the wage rate causes both an income and a substitution effect on an individual’s labor supply.
The substitution effect of a higher wage rate induces longer work hours, other things equal.
This is countered by the income effect: higher income leads to a higher demand for leisure, a normal good.
If the income effect dominates, a rise in the wage rate can actually cause the individual labor supply curve to slope the “wrong” way: downward.
The Individual Labor
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(a) The Substitution Effect Dominates |
(b) The Income Effect Dominates |
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Wage rate |
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Wage rate |
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labor |
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curve |
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Individual labor supply curve
Quantity of leisure (hours) |
Quantity of leisure (hours) |
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Shifts of the Labor Supply Curve
The market labor supply curve is the horizontal sum of the individual supply curves of all workers in that market.
It shifts for four main reasons:
changes in preferences and social norms changes in population
changes in opportunities changes in wealth
SUMMARY
1. There are markets for factors of production, including labor, land, and both physical capital and human capital. These markets determine the factor distribution of income.
2. Profit-maximizing price-taking producers will employ a factor up to the point at which its price is equal to its value of the marginal product—the marginal product of the factor multiplied by the price of the output it produces. The value of the marginal product curve is therefore the individual price-taking producer’s demand curve for a factor.
SUMMARY
3. The market demand curve for labor is the horizontal sum of the individual demand curves of producers in that market. It shifts for three main reasons: changes in output price, changes in the supply of other factors, and technological changes.
4. When a competitive labor market is in equilibrium, the market wage is equal to the equilibrium value of the marginal product of labor, the additional value produced by the last worker hired in the labor market as a whole. This insight leads to the marginal productivity theory of income distribution, according to which each factor is paid the value of the marginal product of the last unit of that factor employed in the factor market as a whole.
SUMMARY
5. Large disparities in wages raise questions about the validity of the marginal productivity theory of income distribution. Many disparities can be explained by compensating differentials and by differences in talent, job experience, and human capital across workers. Market interference in the form of unions and collective action by employers also creates wage disparities. The efficiencywage model, which arises from a type of market failure, shows how wage disparities can result from employers’ attempts to increase worker performance.
SUMMARY
6. Labor supply is the result of decisions about time allocation, where each worker faces a trade-off between leisure and work. An increase in the hourly wage rate tends to increase work hours via the substitution effect but to reduce work hours via the income effect. If the net result is that a worker increases the quantity of labor supplied in response to a higher wage, the individual labor supply curve slopes upward.
7. The market labor supply curve is the horizontal sum of the individual labor supply curves of all workers in that market. It shifts for four main reasons: changes in preferences and social norms, changes in population, changes in opportunities, and changes in wealth.