The immobility of labour
Geographical immobility causes an imbalance in the labour supply amongst certain geographical areas and stems from the unwillingness of labour to move to another location in order to seek work. This may be down to a number of reasons such as, not wanting to move away from family, high travel or accommodation costs, differences in the cost of living etc.
Occupational immobility of labour often occurs during structural changes to the economy for example, the shift in the economy from manufacturing to services led to large amounts of unemployment during the transition period. This is due to the fact that many people working in the manufacturing industry lacked the skills required to transition into service sector jobs. As a result of this, the jobs that do require labour with higher skill sets offer a higher wage. This is due to the lack of supply for higher skilled jobs e.g. those in which more qualifications are required.
Factors that influence the supply of labour to a particular occupation
Wage in substitute occupations
If the wage in substitute occupations are higher, then the worker has a greater incentive to leave their current occupation for one that is better paid. In doing so, the labour supply for that occupation will decrease.
Barriers to entry
If there are high barriers to entry for a certain occupation, then the supply of labour for that occupation will decrease. The barriers to entry can be in the form of minimum qualification requirements or university degrees etc. These requirements remove a large percentage of the population from applying for the job as they’re less likely to be eligible.
Non-monetary job characteristics
There are a range of non-monetary job characteristics that can attract more workers to an occupation. For example, the job hours offered may be longer than a worker’s current job, there may be more promotion opportunities or longer breaks etc. All of these factors can lead to the supply of labour for a given occupation either shifting inwards or outwards.
Improvements in occupational mobility of labour
An increase in the number of people that have qualifications can cause a reduction in occupational immobility as there are now more people that are qualified for higher skilled jobs. This will lead to an increase in the supply of labour for higher skilled occupations. In addition to this, a reduction in geographical immobility can be caused by factors such as cheaper transport. By lowering the cost of transportation those travelling on public transport can travel to a new area of work at more affordable price e.g. those that commute into London for work. In addition to this, an increase in the price of affordable housing makes it easier for people to work in a different city. Overall, this can lead to an increase in the labour supply for occupations that are located near affordable housing.
The chance to work overtime can attract a lot of people to an occupation. This is especially the case for those looking to have some extra income which can be achieved through longer working hours. As such those occupations offering overtime are likely to see an increase in the supply of labour available to them.
Size of the working population
The supply of labour for all occupations will increase if there is an increase in the size of the working population. For example, if there are people that were not actively looking for work who now are due to public policy changes such as a reduction in job seekers allowance. In addition to this, the free movement of people within EU countries can provide UK with lots of labour. Therefore, once the UK leave the EU the supply of labour for occupations which rely on EU workers may decrease.
Value of lesuire time
If there is an increase in the value of lesuire time then workers are likely to reduce the number of hours or days that they work. As such, firms will see a decrease in the supply of labour available to them.
The effect of the previous factors affecting the supply of labour can be seen on the diagram above. An increase in the supply of labour (S1 to S2) will cause an increase in the quantity of workers from Q1 to Q2 and a decrease in the supply of labour (S1 to S3) will cause a decrease in the quantity of workers from Q1 to Q3.
The individual labour supply curve
The main two characteristics that determine the shape of the individual supply curve are the income effect and the substitution effect. Firstly, the income effect can be both positive and negative.
A negative income effect occurs when individuals have target incomes that they want to reach. Therefore, as they receive a wage rise, they don’t have to work as many hours in order to reach that desired income target. As a result of this, they increase their time spent on leisure activates and decrease the amount of time they spend at work. It is important to understand that one cannot increase both their leisure time and their work time as one is the opportunity cost of the other i.e when you are working you are not experiencing leisure time and when you are having leisure time you are not working.
The positive income effect occurs when the rise in the wages an individual receives incentivizes them to increase the hours in which they work.
The substitution effect is based on the concept of opportunity cost. Leisure time is the opportunity cost of working and working is the opportunity cost of leisure time. Unlike the income effect, the substitution effect is always positive and as such it incentivizes individuals to work longer. This is explained below:
As an individual’s wage increases, so does the opportunity cost of leisure time. For example, before the wage rise, one hour of leisure time spent could have been instead used to earn £10 of money from working. However, after the wage rise, one hour of leisure time now comes at an opportunity cost of £15, which could have been earned if the individual chose instead to work in that one hour instead of fill it with leisure activities. As a result of this, the increased opportunity cost will incentivize the individual to increase the time they spend at work and therefore reduce their time spent on leisure activities.
Both the substitution effect and the income effect can be shown on the diagram below:
To start off with the income effect is positive. This is due to the fact that at lower wages, the workers must… Read more