Suppose an industry is small relative to the whole economy and employs workers with common skills. These industries tend to pay the ‘going wage’. For example, a very large number of students are willing to work at the going rate for telemarketing firms. This means that the supply curve of such labour is in effect horizontal from the standpoint of the telemarketing industry.
But some industries may not be small relative to the pool of labour they employ. And in order to get more labour to work for them they may have to offer higher wages to induce workers away from other sectors of the economy. Consider the behaviour of two related sectors in housing – new construction and home restoration. New home builders may have to offer higher wages to employ more plumbers and carpenters, because these workers will move from the renovation sector only if wages are higher. In this case the new housing industry’s labour supply curve slopes upwards.
In the long run, the industry’s supply curve is more elastic than in the short run. When a sectoral expansion bids up the wages of information technology (IT) workers, more school leavers are likely to develop IT skills. In the longer run the resulting increased supply will moderate the short-run wage increases.
Application Box: Labour supply policy and economic incentives
Governments can have a significant influence on the amount of labour supplied in the market place. The wage rate that the individual actually faces is the net-of-income-tax wage. Since the government can alter the income tax rate, it can therefore impact the amount of labour supplied. The elasticity of the labour supply is critical in determining the extent to which labour will react to a change in its wage rate.
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