Theory of Labor Supply

The Theory of Labor Supply defines the supply of labour as the number of workers willing to and able to work for a specific wage rate in a given industry.

The Theory of Labor Supply defines the supply of labour as the number of workers willing to and able to work for a specific wage rate in a given industry.

Elasticity of Labor Supply

This phenomenon is used to denote cheap labor that is available at some places. The phenomenon is used to define the change in labor supply in relation to the change in wage rate at a given point of time. The elasticity measures the extent of the impact caused by the alteration of wage on the labor supply at a given point of time. Normally it is in the low-scale production that cheap labor is expected. This means that labor is readily available at a fairly low rate of wage. In occupations that require specific skill the labor supply is not elastic.

Labor Supply in Macroeconomy

The macroeconomic labor supply analyzes the total number of employees that are available and willing to work for an amount paid to them. This encompasses the employed labor along with the new recruits and the unemployed. The amount of output generated by an economy depends on the total supply of labor available to produce goods and services. The UK government is endeavoring to increase the production by increasing the total active labor force.

Labor supply in Microeconomy

The demand and supply of labor is fundamental to production. The supply schedule is the relationship between the present wage rate and the number of labour supplied at that wage rate. The supply schedule is normally directly proportional to the wage rate . In the long run a positively sloped supply curve represents stagnancy of specialized resources. In a perfectly competitive market, profit is optimized by producing at a price equal to the producer’s marginal cost curve. The sum of the individual producer’s marginal cost is expressed through the supply curve. Under normal circumstances the increase in the wage of an employee increase the production since the labor receives an incentive to work. But this phenomenon can also affect the worker negatively because extreme wage increments might make him/her lazy thus generating less production. Therefore the wage earner will experience the law of diminishing marginal utility. In case of a child labor two stable equilibrium points can be reached- a high wage equilibrium and a low wage equilibrium. The child will produce more with an increase in its wage but to a certain point because it might cease to be a part of the active workforce due to certain reasons.