Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 7 Topics for Further Study
Chapter 21 of 36 The Theory of Consumer Choice
Section 22 of 25
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Is the idea of a backward-sloping labor-supply curve, supply of labor decreasing as wage goes up, just a theoretical curiosity?
Evidence shows the labor-supply curve over long periods does in fact slope backward.
A hundred years ago, many people worked six days a week, today five day workweeks are the norm.
As the length of the workweek has been falling the hourly wage of the typical worker has been rising.
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Economists’ explanation for this historical pattern is:
Over time, advances in technology raise workers' productivity and the demand for labor.
The increase in labor demand raises equilibrium wages.
As wages rise, so does the reward for working.
Yet, rather than responding to this increased incentive by working more, most workers instead choose to take part or all of their greater prosperity as more leisure.
The income effect of higher wages dominates the substitution effect.
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For example, if your per hour wage increases from $20 to $30:
Income effect: you have more money now, you feel you have enough money, your demand for leisure time increases, so you want to work less.
Substitution effect: the price of leisure time has increased because the money you lose for working less has gone up, so you want to work more.
If the income effect dominates you work less.
If the substitution effect dominates you work more.
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