Cambridge International as and a level Economics Ebook

The long-run supply of labour
Th
is is of particular signifi cance for the economy as 
a whole. Th
ere are important contrasts here between 
developed and developing economies, involving wider 
economic factors including the following:
■
The size of the population: In some developed economies, 
the total population is relatively stable; in others it is 
increasing at a modest rate mainly due to increasing 
immigration. In contrast, the population of Italy is 
actually declining quite markedly. With life expectancy 
increasing, there are relatively fewer people of working 
age. In contrast, in most developing economies there is 
an increase in the overall supply of labour from within 
mainly due to higher birth rates and improved medical care 
for young children. Consequently, increasing numbers of 
young people join the labour market. This means the 
long-run supply curve for labour shift s to the right, 
indicating that more workers are willing to supply their 
labour at a given wage rate.
■
The labour participation rate: This term is used to 
determine the proportion of the population of working age 
actually in employment. In many developed economies, 
workers oft en choose to leave the labour market, by taking 
‘early retirement’, before the normal age for retirement, 
so reducing the labour participation rate. At the lower 
end of the age range, with more students electing for 
higher education, the labour participation rate is also 
falling slightly. The combined eff ect has been for a slight 
reduction in the labour participation rate, so shift ing the 
long-run labour supply curve to the left .
■
The tax and benefits levels: As we saw earlier in 
Figure 8.11
, 
there comes a point where the work–leisure trade-off
aff ects an individual’s labour supply. This also aff ects the 
supply of labour for the economy as a whole, particularly 
in developed economies. Governments therefore have 
to be very careful in their taxation and social security 
policies to ensure that the long-run supply of labour is not 
adversely aff ected through a reduction in the willingness 
of people to work. In the UK, the top rate of income tax 
was reduced from 50% to 45% in 2013 – 20 years ago it was 
much more progressive, with marginal tax rates as high 
as 80% of the increase in income for the highest-paid. In 
such circumstances, there is clearly a huge disincentive 
for someone to stay in the labour market. The level of 
unemployment and social security payments can also 
aff ect the long-run supply of labour in a similar way as we 
saw earlier. Through their supply side policies, therefore, 
governments seek to provide incentives for certain types 
of labour to remain active in the labour market (see 
Chapter 5
).
■
Immigration and emigration: These aff ect the long-run 
supply of labour in an economy. Where there are labour 
shortages, as was the case in the UK during the late 1950s 
and early 1960s, migrants moved from Commonwealth 
countries such as Barbados, Jamaica, Bangladesh, India 
and Pakistan, oft en to work in relatively low-pay industries 
and the public services. This increased the supply of 
labour. Emigration from these countries in turn relieved 
pressures in their labour markets. In the past, the UK has 
faced labour shortages in nursing, teaching and ‘high-tech’ 
industries as well as in other skilled manual occupations. 
Since 2004, the geographical enlargement of the EU 
has seen a huge influx of well over one million migrant 
workers from the new member states in Central and 
Eastern Europe.
Th
e above factors determine the long-run supply of labour. 
Shift s to the left and to the right in the long-run supply of 
labour are shown in 
Figure 8.13.
In the long run, the supply of labour to a particular 
fi rm, as distinct from the economy, is infl uenced by the net 
advantages of a job. Th
ese include pecuniary advantages 
and non-pecuniary advantages.
Number of workers employed
0
W
age rate
L
1
L
2