You might think that companies are supplying jobs to people. But in fact, people are the suppliers in that relationship. What do people supply? Labor! Yes, you’re a supplier, and companies need your labor to survive. But what’s all this about? Why do you even supply labor and not keep it for yourself? What is the labor supply curve and why is it upward sloping? Let’s find out!
Labor supply curve definition
The labor supply curve is all about supply in the labor market. But let’s not get ahead of ourselves here: what is labor? What is the labor market? What is labor supply? What’s the point of the labor supply curve?
Labor simply refers to the work human beings do. And the work human beings do is a factor of production. This is because firms need labor so they can produce their goods.
Picture a coffee processing firm with an automatic harvester. Surely, it’s an automatic harvester and the firm does not need humans to harvest the coffee. But, somebody needs to control this automatic harvester, somebody needs to service it, and as a matter of fact, somebody needs to open the door for the harvester to go out! This means the firm needs labor.
Labor: the work human beings do.
There needs to be an environment where firms can acquire this labor and people can provide this labor. In simple terms, labor supply is people's provision of labor. This environment where firms can acquire labor is what economists call the labor market.
The labor market: the market where labor is traded.
Labor supply: the willingness and ability of workers to make themselves available for employment.
Economists show labor supply on the labor market graph, which is the graphical representation of the labor market. So what is the labor supply curve?
Labor supply curve: the graphical representation of the relationship between the wage rate and the quantity of labor supplied.
Labor supply curve derivation
Economists need to analyze the labor market, and they do this with the help of the labor market graph, which is plotted with the wage rate (W) on the vertical axis and quantity or employment (Q or E) on the horizontal axis. So, what are the wage rate and the quantity of employment?
The wage rate is the price firms pay for employing labor at any point in time.
The quantity of labor is the quantity of labor demanded or supplied at any point in time.
Here, we are focusing on labor supply, and to show this on the labor market graph, economists use the quantity of labor supplied.
Quantity of labor supplied: the quantity of labor made available for employment at a given wage rate at a given time.
Figure 1 below shows a labor supply curve:
Fig 1. - Labor supply curve
The market labor supply curve
Individuals work by giving up leisure, and this is quantified in hours. Therefore, the labor supply curve of the individual will show hours as the quantity supplied. However, in the market, several individuals are supplying labor at the same time. This means that economists can quantify this as the number of workers available.
First, let’s look at the market labor supply curve in Figure 2.
Fig 2. - Market labor supply curve
Now let’s look at the individual labor supply curve in Figure 3.
Fig 3. - Individual labor supply curve
Labor supply curve upward sloping
We could say that by default, the labor supply curve is upward sloping. This is because people are willing to supply more labor if the wage rate is higher.
The wage rate has a positive relationship with the quantity of labor supplied.
Individual labor supply curve: income and substitution effects
There is an exception when it comes to the individual labor supply curve. When the wage rate increases, an individual can:
- Work less since they gain the same or more money for less work (income effect).
- Work more hours since the opportunity cost of leisure is now higher (substitution effect).
Based on these two alternatives, the individual labor supply curve can either slope upward or downward. Figure 4 is based on the following example:
A young man works for 7 hours a day and receives $10 in wages. The wage rate was then increased to $20. As a result, he could either work for 8 hours a day as the opportunity cost of leisure increases (substitution effect) or only 6 hours a day as he gains the same or more money for less work (income effect).
Let’s show the two alternatives using the individual labor supply graph:
Fig 4. Income vs. substitution effect on individual labor supply curve
Figure 4 above shows the income effect on the left panel and the substitution effect on the right panel.
If the income effect dominates, then the individual labor supply curve would slope downwards,
but if the substitution effect dominates, then the individual labor supply curve would slope upwards.
The shift in the labor supply curve
Normally, the market labor supply curve slopes upward from the left to the right. But did you know it could shift inward (left) and outward (right)? A series of factors can cause a shift in the labor supply curve.
Apart from the wage rate, a change in any factor that influences how willing workers are to work will cause the labor supply curve to shift.
These factors include:
- Changes in preferences and norms.
- Changes in population size.
- Changes in opportunities.
- Changes in wealth.
A shift in the labor supply curve is a shift in labor supply.
Fig 5. - The shift in labor supply curve
Figure 5 shows a shift in the labor supply curve. In the left panel, the individual labor supply curve shifts outwards (to the right) leading to more hours of employment (E1 compared to E) at any fixed wage rate W. In the right panel, the individual labor supply curve shifts inwards (to the left) leading to fewer hours of employment (E1 compared to E) at any fixed wage rate, W.
Changes in preferences and norms and shifts in the labor supply curve
A change in societal norms can result in a change in labor supply. For instance, in the 1960s, women were limited to household work. However, as society progressed over the years, women were increasingly encouraged to pursue higher education and explore broader employment options. This resulted in more women working outside of the home today. This means the willingness and availability of labor have both changed (increased), shifting the labor supply curve to the right.
Population changes and shifts in the labor supply curve
When the population size increases, this means more people are available and willing to work in the labor market. This causes a shift in the labor supply curve to the right. The opposite is true when there is a drop in the population size.
Changes in opportunities and shifts in the labor supply curve
When newer, better-paying jobs emerge, the labor supply curve for a previous job can shift to the left. For instance, when shoemakers in one industry realize that their skills are needed in the bag-making industry for higher wages, the labor supply in the shoemaking market decreases, shifting the labor supply curve to the left.
Changes in wealth and shifts in the labor supply curve
When the wealth of workers in a given industry increases, the labor supply curve shifts to the left. For instance, when all shoemakers get wealthier as a result of an investment the shoemakers’ union made, they will work less and enjoy more leisure.
A wealth increase resulting from a wage change will only cause a movement along the labor supply curve. Remember, a shift in the labor supply curve is caused by changes in factors apart from the wage rate.
Labor Supply Curve - Key takeaways
- The labor supply curve graphically represents labor supply, showing the relationship between the wage rate and the quantity of labor supplied.
- The wage rate has a positive relationship with the quantity of labor supplied. This is because people are willing to supply more labor if the wage rate is higher.
- Individuals have to give up leisure to work, and the individual labor supply curve focuses on hours whereas the market labor supply curve focuses on the number of workers.
- Changes in wage rate only cause movements along the labor supply curve.
- The factors that can cause a shift in the labor supply curve are changes in preferences and norms, changes in population size, changes in opportunities, and changes in wealth.
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