Answer to Question #153243 in Macroeconomics for Tinotenda

Question

Explain the classical theory of labor supply and comment on the shapes of the labor supply function

Answer 1

Solution:

The classical theory of labor supply is based on the assumption that full employment is provided and full employment output is produced when there is wage rate flexibility in a competitive market. The real wage rate is established by the forces of demand and supply in the labor market. Demand for labor is a negative function of the real wage rate. The demand for labor increases with a fall in the real wage rate and decreases with a rise in the real wage rate. According to classical theory, involuntary employment does not exist, and that there is a possibility of some amount of frictional unemployment that disappears in the long run towards full employment.

The shapes of the labor supply function include the following:

·        The backward bending S-shaped labor supply curve – This depicts a situation where real inflation-corrected wages increase beyond a particular level. Therefore, people sill substitute leisure time for paid work time and hence higher wages lead to a decrease in the labor supply being offered.

·        The inverted S-shaped labor supply curve – This depicts a situation where the quantity of labor time supplied falls as wages rise. Since most people face some minimum level of income required to meet their subsistence needs, lowering wages increases the amount of labor time offered.