Resource Markets

The Supply of Labor

The supply of labor is the amount that individuals want to work at each wage. The supply of labor is determined by the trade-off between labor and leisure (i.e., not working).
The supply of labor is the total amount of hours that employees are available to work. As with labor demand curves, labor supply curves are analogous to supply curves in the goods market in that they represent the price of labor (the wage) versus the quantity of labor supplied. In other words, labor supply curves represent how much people are willing and able to work at each wage. Like supply curves in goods markets, labor supply curves tend to slope upward, indicating a positive relationship between the wage and the quantity of labor supplied:
The supply curve of labor shows the quantity of labor (in terms of hours or number of workers) that will be supplied at each level of wages. Each worker usually wants to work more hours the more they are paid for each hour, to maximize total income. However, at certain wage levels, a worker may be willing to reduce the hours worked in order to have more leisure time.
The supply of labor is not directly dependent on how much employees like working but is instead a function of how much they value leisure (time spent not working). Time is viewed as being split into labor and leisure; the labor supply goes up when the consumption of leisure goes down and vice versa. Like other things consumed, leisure has a price: sitting on the couch is not free in an economic sense. Instead, the price of leisure is equal to the wage, since the wage is the opportunity cost of not working (that is, how much one gives up by consuming leisure rather than working). If an employee chooses to take a vacation, he or she is choosing not to perform labor, thus choosing the opposite of earning income. Time off comes at the cost of not gaining money.

The use of leisure by employees generally decreases as the wage increases. This in turn implies that the supply of labor generally increases when the wage increases. For example, many workers would be willing to work more hours at a wage of $25 than at a wage of $15.

Wages Compared to Demand for Leisure and Willingness to Work

Wage (per hour) Demand for Leisure (hours per day) Supply of Labor (hours per day)
$15 16 8
$25 14 10

Increasing wages increases the total hours employees are willing to spend working rather than not working.

At extremely high wages, on the other hand, workers might be making so much money that they actually choose to work fewer hours when their wage increases. Few people would be likely to work 40 hours per week at a wage of one million dollars per hour, for example. Therefore, the labor supply curve is often drawn as bending backward (having a negative slope) at high wages, although sometimes this part of the labor supply curve is not explicitly shown on a graph.