Why can a higher wage increase or decrease hours worked?
The wage is both the price of leisure and hourly income, creating opposing substitution and income effects.
Follow the cause and effect
Write c=M+w(T−R) and impose 0≤R≤T.
Solve the choice of c and R under preferences.
When w changes, separate leisure substitution from the income effect.
The model you are using
Conditions for this model
Constant hourly wage, continuous hours, 0≤R≤T and M≥0.
The exam trap
Do not assume labor supply must slope upward everywhere; the income effect may dominate at high income.
Connect the reasoning to the graph
What changes
- A wage increase pivots the budget around M on the consumption axis and raises full income.
What stays fixed
Constant hourly wage, continuous hours, 0≤R≤T and M≥0.
Keep these conditions throughout the comparison; change only what the case above specifies.
What to inspect
When w changes, separate leisure substitution from the income effect.
Compare before and after, and locate the conclusion on the graph.
5 MINUTES · TRANSFER THE IDEA
Can you explain it without the lesson?
Explain how higher nonlabor income affects leisure and work when leisure is normal.