David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

CHAPTER 10 The labour market
Thus labour force participation rises with (a) a higher real hourly wage rate, (b) lower fixed costs of working,
(c) lower income from non-labour sources, and (d) changes in tastes in favour of more work and less
leisure. Is this why participation by married women increased?
First, there was a change in social attitudes to work, especially to work by married women. Indifference
curves became flatter. Second, pressure for equal opportunities for women raised women's real wages. The
budget line for women working rotated from AD to AF in Figure 10.5. Finally, the fixed costs of working
fell. Automatic ovens, labour-saving devices for housework, a second family car and many other changes,
not least in the attitude of husbands, reduced the cost of work, especially for married women.
We have reached two conclusions. First, a higher real wage rate raises total labour supply but perhaps by
less than is commonly thought. Second, this operates more by sucking people into the labour force than by
greatly raising the supply hours of those already in the labour force. This analysis relates best to the supply
of unskilled workers.
The supply of labour to an industry
Now we discuss an individual industry. Suppose it is small relative to the economy and wishes to employ
workers with common skills. It has to pay the going rate for the job. Jobs in different industries have
different non-monetary characteristics, such as risk, comfort or anti-social hours like night shifts. The
going rate must be adjusted industry by industry to allow for the equilibrium wage differential that offsets
these non-monetary characteristics and makes workers indifferent to where they work. Dangerous, nasty
industries have to pay more than pleasant, safe industries if they are to attract workers.
Adjusted in this way, this determines the wage at which a small industry can hire as many workers as it wants
from the economy-wide labour pool. At this wage, the industry faces a horizontal labour supply curve.
Many industries are not this small relative to all the skills they wish to employ. The steel industry is a big
user of welders, the freight industry a big user of lorry drivers. When an industry is a significant user of a
particular skill, higher employment in the industry bids up the wages of that particular skill in the whole
economy. In the short run, the industry's labour supply curve slopes upwards.
In the long run, the industry's labour supply curve may be flatter. When short-run expansion bids up the
wages of computer programmers, more school-leavers train in this skill. In the long run, the economywide
supply rises and the wages of these workers fall back a bit. An individual industry does not have to
offer such a high wage in the long run to increase the supply of that type of labour to the industry.
In the short run, the supply of a given skill may be nearly fixed. To get a larger share of the total pool,
an individual industry has to offer higher relative wages than other industries to bid workers away from
them.
Industry labour market equilibrium
Figure 10.6 shows equilibrium in the labour market for an industry. Its labour demand curve Dr,D1. slopes
down and crosses the upward-sloping labour supply curve SrSr at the equilibrium point E. Employment is
L0 and the wage W0• We do not distinguish long-run and short-run supply curves, though this is easily
done.
We draw the industry labour demand curve D1D1 for a given output demand curve. A recession in the
building industry would shift the demand curve for cement to the left. The equilibrium price of cement
falls. This shifts to the left the marginal value product oflabour curve MVPL for each cement manufacturer.
Hence D1D1 shifts to D;D; for the cement industry. At the new equilibrium E1, wages and employment are
lower in the industry.
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