- Labour-leisure budget constraint
- A labour-leisure budget constraint shows every combination of leisure and income a person can have, given the hours available and the wage paid for each hour worked.
- Backward-bending labour supply curve
- A backward-bending labour supply curve is one on which the hours a person offers rise with the wage at first and then fall as the wage rises further.
Why a wage rise pulls two ways
Can you name the three ideas that decide how a wage rise changes the hours you work?
At A-level the labour supply curve slopes up: a higher wage draws out more hours. Put the choice on an indifference curve diagram and a wage rise turns out to be a price change like any other, with a substitution effect and an income effect.
The price of leisure is the wage: each hour not worked costs the pay that hour would have earned.
Can you think of an example?
A shop worker on £12 an hour who takes Saturday afternoon off gives up about £48 for four hours. Her wage rises to £15, and the same afternoon now costs £60, so leisure has become dearer.
The substitution effect of a wage rise is the move towards more work and less leisure, because leisure's opportunity cost has increased.
Can you think of an example?
At a higher hourly rate each hour of overtime earns more, so, holding her level of wellbeing fixed, a worker gives up some evenings off to work extra shifts.
The income effect of a wage rise is the move towards more of both leisure and income, since both are normal goods and the person is better off.
Can you think of an example?
A freelance designer's day rate rises by a third, so she is better off. Being better off, she wants more time as well as more money: she takes Fridays off, and four days still pay more than five used to.