Cambridge International as and a level Economics Ebook

The individual’s supply of labour
As with any supply, price (or wage in this case) has an 
important bearing on the decision of any individual 
worker to enter the labour market. If the wage is too 
low, someone may determine that it is not worth the 
effort of going to work and will decide to stay at home. 
Not many people are in this position – most of us need 
to work to live. Economic theory assumes that there is 
a positive relationship between labour supply and the 
wage rate. So, as the wage rate increases, more people 
are willing to offer their services to employers. This is 
represented by the individual’s labour supply curve, 
which mainly slopes upwards (see
 Figure 8.11
). 
Number of hours supplied
0
W
age rate
X
With high wage rates,
individuals work less
and have more leisure
Leisure is substituted
for work as the wage
rate increases
High
Low
Middle
Figure 8.11 
An individual’s labour supply curve
Beyond a certain point, individuals will take the view 
that they prefer leisure to work. This point is indicated 
by the backward-sloping curve from point X. Before 
this point, an individual worker is more willing to 
supply his or her labour as the wage rate increases. 
It must be stressed that this point depends on the 
individual’s attitude to work and leisure – point X on 
any individual’s supply curve will vary.
A further factor that can aff ect an individual’s supply 
of labour is the income tax rate. In all countries this tends 
to be progressive, as we noted earlier. Low-wage workers 
pay little or no tax. As wages rise, more of the increase is 
paid in tax to the government. In the UK, for example, 
the standard rate of income tax in 2014 was 20%, with a 
maximum rate of 45% for the highest income earners. In 
other developed countries this higher rate is oft en above 
50%. Th
e downside could be that a high tax rate stifl es the 
incentive to work. Governments must therefore be very 
careful to not do this as it will adversely aff ect economic 
prospects if key workers are not encouraged to work 
because of the high tax rates.