Labor Supply Curve Income Effect

Income effects on labor supply historical trends lottery winners and the carnegie conjecture.

Labor supply curve income effect. From the reference library edexcel theme 3 micro knowledge book labour markets. The idea of a backward sloping labor supply curve might at first seem like a mere theoretical curiosity but in fact it is not. But the income effect may work in the opposite direction. The substitution effect of a rise in the hourly wage rate.

In such a situation the supply of labour would be perfectly inelastic. Evidence indicates that the labor supply curve considered over long periods of time does in fact slope backward. In economics a backward bending supply curve of labour or backward bending labour supply curve is a graphical device showing a situation in which as real inflation corrected wages increase beyond a certain level people will. Between points a and b the positive substitution effect of the wage increase outweighs the negative income effect.

A backward bending supply curve for labor. Figure 12 6a backward bending supply curve for labor as the wage rate increases from 10 to 15 per hour the quantity of labor meredith wilson supplies increases from 42 to 48 hours per week. The income effect explains the backwards bending section of the labour supply curve above a certain wage rate as the wage rate rises workers can afford to work for fewer hours whilst maintaining their level of income. When an individual prefers leisure to income then the supply of labour number of hours worked by an individual will decrease as the wage rate rises.

Between points a and b the positive substitution effect of the wage increase outweighs the negative income effect. The indifference curves show diminishing marginal rates of substitution of leisure for income. But the supply curve of labour is not always upward sloping. When a target income has been reached and people prefer spending more time on leisure rather than earning more income.

This is because in such a case income effect which tends to reduce the work effort outweighs the substitution effect which tends to increase the work effort. The income effect of a tax induced decrease in net wage is to increase work effort i e the number of the hours worked provided leisure is a normal good. As the wage rate increases from 10 to 15 per hour the quantity of labor meredith wilson supplies increases from 42 to 48 hours per week. If leisure is an inferior good both substitution effect and income effect work in the same direction.

So his labour supply curve bends back to the left. A works fewer hours as the wage rate rises. A s income effect outweighs the substitution effect the total effect of wage rise on leisure is positive n 2 n 1 and h 2 h 1.