Labour Supply Theory Flashcards
(12 cards)
What two goods are involved in the labour supply decision?
Leisure (measured in hours not worked)
Consumption (goods bought using wage income from labour)
What is the labour supply budget constraint?
C=w(24−L)+V
C = consumption
w = wage
L = leisure
V = non-labour income
(Total time endowment usually = 24 hours)
What is the slope of the budget line in labour supply?
− w/1
It represents the opportunity cost of one more hour of leisure — you lose
𝑤
w units of consumption.
How do we find the optimal labour supply decision?
Maximise utility over leisure and consumption, subject to the budget constraint.
Use the tangency condition:
MUL/MUC = w
What are the two effects of a wage increase on labour supply?
Substitution effect: Leisure becomes more expensive → work more
Income effect: Higher wage raises real income → may choose more leisure (work less)
Why might a labour supply curve bend backward at high wages?
At high wages, the income effect may dominate, leading individuals to work less despite higher wages.
What happens when the wage falls?
Substitution effect: Work less, since leisure is cheaper
Income effect: May want to work more to restore income — net effect depends on which is stronger
How does an increase in non-labour income (V) affect labour supply?
Pure income effect: Individual consumes more leisure → works less
What is labour supply elasticity?
The responsiveness of hours worked to changes in the wage rate.
e = %change in labour supply/ %change in wage
What do studies generally find about labour supply elasticities?
Small for prime-age men (typically inelastic)
Larger for secondary earners and some women (more elastic)
Which groups show stronger substitution effects in labour supply?
Part-time workers and secondary earners — more responsive to changes in wage
