Backward Bending Labor Supply

1
Backward Bending Labor Supply

• So far assumed that L(S) and L(D) curves cross at
  a wage at which the L(S) curve slopes upward.
• At high wages, income effect may dominate, L(S)
  curve may bend backward.
• What if L(S) curve bends backward when it crosses
  the L(D) curve?

Wage

Wage
L(S)
L(D)
L
2
Backward Bending Labor Supply

• If L(S) is more steeply sloped than L(D)
• Equilibrium wage W still wage at which L(S)
  curve L(D) curve cross
• Equilibrium qty. of labor transacted L still
  L(S) and L(D) at which curves cross.
• Employer and employee surplus equal areas shown
  employee surplus flawed.

Wage

Wage
L(S)
W
L(D)
L
L
Employee surplus
Employer surplus
3
Backward Bending Labor Supply

• If L(S) is more steeply sloped than L(D)
• If wage is greater than equilibrium wage, L(S)
  greater than L(D)
• More workers seeking jobs than job vacancies
  firms seek to fill
• Wage bid down to equilibrium wage

Wage

Wage
L(S)
W(hi)
W
L(D)
L
L(D)
L(S)
4
Backward Bending Labor Supply

• If L(S) is more steeply sloped than L(D)
• If wage is lower than equilibrium wage, L(D)
  greater than L(S)
• More job vacancies firms seek to fill than
  workers seeking jobs
• Wage bid up to eq. wage
• Stable equilibrium when wage ? eq. wage, wage is
  bid back to eq. wage

Wage

Wage
L(S)
W
W(lo)
L(D)
L
L(D)
L(S)
5
Backward Bending Labor Supply

• If L(D) is more steeply sloped than L(S)
• Equilibrium wage W still wage at which L(S)
  curve L(D) curve cross
• Equilibrium qty. of labor transacted L still
  L(S) and L(D) at which curves cross.
• Considered an unstable equilibrium, unrealistic
  depiction of labor market.

Wage

Wage
L(D)
L(S)
W
L
6
Backward Bending Labor Supply

• If L(D) is more steeply sloped than L(S)
• If wage is greater than equilibrium wage, L(D) is
  greater than L(S)
• More job vacancies firms seek to fill than
  workers seeking jobs
• Wage bid upward, away from W

Wage

Wage
L(D)
L(S)
W(hi)
W
L(S)
L(D)
7
Backward Bending Labor Supply

• If L(D) is more steeply sloped than L(S)
• If wage is less than W, L(S) is greater than
  L(D)
• More workers seeking jobs than job vacancies
  firms seek to fill
• Wage bid downward, away from W
• Unstable equilibrium when wage ? eq. wage, wage
  is bid away from eq. wage.

Wage

Wage
L(D)
L(S)
W
W(lo)
L(S)
L(D)
8
Shifts in Labor Supply
L(S)

• Suppose something happened to increase the
  quantity of labor supplied, other than a change
  in the employee wage
• Increase in preference for consumption over
  leisure
• Decrease in employee wage of other kinds of work
• Decrease in non-labor income of workers

Wage
W
L(D)
L
9
Shifts in Labor Supply
L(S)
L(S)

• Increase in labor supply
• Expressed with outward shift of labor supply
  curve
• Quantity of labor supplied increases
  independently of price.
• Lower equilibrium wage
• Higher equilibrium quantity of labor transacted

Wage
W
W
L(D)
L
L
10
Shifts in Labor Supply
L(S)

• Interpretation
• At equilibrium, the quantity of labor supplied
  L(S) equals the quantity of labor demanded
  L(D).
• In other words, all workers seeking jobs have
  jobs, and all firms have all job vacancies filled.

Wage
W
L(D)
L(D)
L(S)
11
Shifts in Labor Supply
L(S)

• Interpretation
• Now, there is an increase in labor supply
• This causes the quantity of labor supplied to
  increase and become greater than the quantity of
  labor demanded.
• In other words, the number of workers who want
  jobs is greater than the number of job vacancies
  firms seek to fill.

Wage
W
L(D)
L(D)
L(S)
12
Shifts in Labor Supply
L(S)

• Interpretation
• As too many workers chase too few jobs, the wage
  is bid downward.
• As the wage declines, the number of people who
  want jobs decreases
• and the number of job vacancies firms open up
  and fill increases

Wage
W
L(D)
L(D)
L(S)
13
Shifts in Labor Supply
L(S)

• Interpretation
• until a new equilibrium wage at which the
  quantities of labor supplied and demanded are
  equal.
• Since the wage decrease caused firms to open more
  job vacancies, the new equilibrium quantity of
  labor transacted is higher than the old one.

Wage
W
L(D)
L(S)
L(D)
14
Shifts in Labor Supply
L(S)
L(S)
L(S)
L(S)

Wage

Wage
W
W
W
W
Elastic L(D)
Inelastic L(D)
L
L
L
L
The greater the elasticity of labor demand, the
smaller the wage decrease, the greater the
employment increase from an increase in labor
supply.
15
Shifts in Labor Supply
L(S)
L(S)

• A decrease in labor supply has the opposite
  effect
• May be caused by increase in non-labor income, in
  preference for leisure over consumption
• Increases equilibrium wage
• Decreases equilibrium quantity of labor transacted

Wage
W
W
L(D)
L
L
16
Shifts in Labor Demand
L(S)

• Suppose something increased the quantity of labor
  demanded, other than a change in the employer
  wage
• Increase in product demand
• Increase in wage of substitute kind of labor
  (sub. effect dominates)
• Decrease in wage of complement kind of labor

Wage
W
L(D)
L
17
Shifts in Labor Demand
L(S)

• Increase in labor demand
• Expressed with outward labor demand curve shift
• Quantity of labor demanded increases
  independently of price
• Higher equilibrium wage
• Higher quantity of labor transacted if L(S) curve
  is upward sloping

Wage
W
W
L(D)
L(D)
L
L
18
Shifts in Labor Demand
L(S)

• Interpretation
• At equilibrium, the quantity of labor supplied
  L(S) equals the quantity of labor demanded
  L(D).
• In other words, all workers seeking jobs have
  jobs, and all firms have all job vacancies filled.

Wage
W
L(D)
L(S)
L(D)
19
Shifts in Labor Demand
L(S)

• Interpretation
• When there is an increase in labor demand, the
  quantity of labor demanded increases and becomes
  greater than the quantity of labor supplied.
• This means that the number of vacancies firms
  wish to fill is greater than the number of
  workers who want jobs.

Wage
W
L(D)
L(S)
L(D)
20
Shifts in Labor Demand
L(S)

• Interpretation
• With too many firms chasing too few workers, the
  wage is bid upward
• causing firms to want to hire fewer workers,
  decreasing the quantity of labor demanded
• and causing more people to want to work,
  increasing the quantity of labor supplied.

Wage
W
L(D)
L(S)
L(D)
21
Shifts in Labor Demand
L(S)

• Interpretation
• until a new, higher equilibrium wage at which
  the quantities of labor supplied and demanded are
  equal is reached.
• Since the wage increase has drawn more workers
  into the market, the new equilibrium quantity of
  labor transacted is higher than the old one.

Wage
W
L(D)
L(S)
L(D)
22
Shifts in Labor Demand
L(S)
L(S)

Wage

Wage
L(D)
L(D)
W
L(D)
L(D)
W
W
W
L
L
L
L
The greater the elasticity of labor supply, the
smaller the wage increase, the greater the
employment increase from an increase in labor
demand.
23
Shifts in Labor Demand
L(S)

• Decrease in labor demand has opposite effect
• May be caused by decrease in product demand, or
  decrease in wage of substitute kind of labor
  (sub. effect dominates), etc.
• Decrease equilibrium wage
• Decreases equilibrium quantity of labor
  transacted

Wage
W
W
L(D)
L(D)
L
L
24
Shifts in Labor Demand

• Effect of labor demand increase is different if
  labor supply curve bends backward at equilibrium
  wage
• Equilibrium wage increases--by a lot
• Equilibrium quantity of labor transacted decreases

Wage
L(S)
W
W
L(D)
L(D)
L
L
25
Shifts in Labor Demand

• Interpretation
• At equilibrium, the quantity of labor supplied
  equals the quantity of labor demanded.
• All workers who want jobs have jobs, and all
  vacancies that firms wish to fill are filled.

Wage
L(S)
W
L(D)
L(S) L(D)
26
Shifts in Labor Demand

• Interpretation
• When labor demand increases, the quantity of
  labor demanded increases and becomes greater than
  the quantity of labor supplied.
• In other words, the number of vacancies firms
  wish to fill is greater than the number of
  workers who want jobs.

Wage
L(S)
W
L(D)
L(D)
L(S)
27
Shifts in Labor Demand

• Interpretation
• The wage is bid upward
• but the income effect is dominant, so the wage
  hike causes fewer people to want work and a
  decrease in the quantity of labor supplied!
• However, the increase in the wage also causes
  firms to close vacancies, also reducing the
  quantity of labor demanded.

Wage
L(S)
W
L(D)
L(D)
L(S)
28
Shifts in Labor Demand

• Interpretation
• Although both L(S) and L(D) are dropping, L(D)
  drops faster, eventually falling enough to be
  equal to L(S) at a new, much higher equilibrium
  wage.
• Since the wage increase has caused fewer workers
  to want to work, the new equilibrium quantity of
  labor transacted is lower.

Wage
L(S)
W
L(D)
L(S)
L(D)
29
Shifts in Labor Demand

• Decrease in labor demand has opposite effect
• May be caused by decrease in product demand, or
  decrease in wage of substitute kind of labor
  (sub. effect dominates), etc.
• Decreases equilibrium wage
• Increases equilibrium quantity of labor transacted

Wage
L(S)
W
W
L(D)
L(D)
L
L