Why is the supply curve of labour for any specific occupation likely to beupward-sloping, even if, for the economy as a whole, people work fewerhours when wage rates increase?

Question

Lyric Fisher

Business

3 March, 20:37

Why is the supply curve of labour for any specific occupation likely to beupward-sloping, even if, for the economy as a whole, people work fewerhours when wage rates increase?

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Giancarlo Simpson · Answer 1

This is because the substitution effect with respect to the rise in the wage rate outweighs the income effect of the rise in the wage rate.

Explanation:

The supply curve for labor is a graph that shows the number of labor hour employees are willing and able to work at different wage rate.

An increase in real wage rate will make people to want to forgo leisure and work more hours to earn more pay. As Leisure become less attractive because it is now expensive, individuals will tend to substitute leisure for work. This is what we call substitution effect of the rise in wage rate.

The substitution effect will work up to a time when workers have amassed so much money that leisure which was hitherto expensive will now become attractive. As individuals tend to increase leisure, the hour available for work will drop. this is called income effect of wage rise.

From the above analysis, it is obvious that there is a double pull on the labor supply curve, economics believe the substitution effect is stronger than the income effect, hence the upward-sloping supply curve for labor.