Question

Using your own example/scenario, explain the backward-bending supply curve of labour. (Hint: Outline in your explanation, the factors responsible for the slope of the supply curve.) (Note: Five marks will be awarded for the description of your example/scenario, five marks will be awarded for the graph and five marks will be awarded for the explanation of the graph.)

Answer 1

In labour markets, there is a backward bending supply curve. This means after a certain point, higher wages can lead to a decline in labour supply. This occurs when higher wages encourage workers to work less and enjoy more leisure time.

Two effects related to backward bending supply curve

Substitution Effect

This effect occurs when worker gets high wages he is encouraged to work more instead of leisure. Therefore in response to high wages supply of labour Increases.

Income effect

The income effect states that a higher wage means workers can achieve a target income by working fewer hours. Therefore, if wages increase, it becomes easier to get enough income through working fewer hours.

Example

• Suppose an individual has very limited demands and he wanted to reach a level where he can earn $35,000 per year. Suppose he reached this level. After his wages increase beyond $30,000 level income effect dominates and person will be interested in more leisure time than work.
• But if the person is of opposite nature. He has large expenses and very less interest in leisure, then substitution Effect will dominate. If wages increase, it gives an increased incentive to work longer hours as he can gain increased income and buy more goods.

Below is the diagram

Gaath Latour Supply Care wage rate wi Income Effect Substitution Effect Subsitution Effect Income Effect 121 Labour

Below W1 wage level Substitution effect is grester than income effect. After W1 level Income effect dominates.

Other factors affecting supply of labour

Fixed Job Contracts. In real world people have to work for fixed number of hours as mentioned in their employment contracts. Even if their wages rise then also they have to work for for fixed hours. They cannot reduce the number of hours.

Motivation Factor. Employees are motivated by many factors other than wages. They may be interested in working more and spending more time at work until and unless work is completed as this gives them satisfaction. In this case motivation will overpower wages.

Part b

If the number of employers are less but no of workers is more then this means that quantity of labour demanded is less but Quantity of labour Supplied is more. As a result:

If increase in quantity Supplied and decrease in Quantity Demanded are equal then equilbrium wage rate will decline and Equilbrium Quantity will remain same.

If increase in Quantity Supplied of labour is more than decreae in Quantity Demanded then Equilibrium wage will fall but Equilibrium Quantity will rise.

If increase in Quantity Supplied is less than decrease in Quantity Demanded of labour then Equilbrium wage will reduce and Equilibrium Quantity of labour will also reduce.