In this video we’ll examine the individual’s supply curve of labour and figure out why
exactly it is backward bending.
As we start our discussion on the supply of labour, it’s important to note that we will
approach this section by considering three levels of the supply of labour.
The individual, the firm or industry and the macroeconomic level.
Now on to the backward bending supply curve of labour for individuals.
To understand the curve, we have to first understand individual behavior.
Individuals have a choice of how to use their time, which is a scarce resource.
They can choose between work or leisure.
The choice of one is the opportunity cost of the other.
As you work more you trade off your leisure time and as you enjoy more leisure time you
give up the opportunity to work.
In order to work, individuals must be offered an attractive wage rate to incentivize them
to work.
As leisure time gets more scarce its value to the individual rises so higher wage rates
must be offered.
For the most part, higher real wages result in more time being offered for work.
This is not always the case though and to understand why I have to ask you a question.
How much would someone have to offer you for you to never work again?
For me currently, that number is approximately $10 million.
Write your number in the comments below.
Think carefully about it!
Acting as a rational economic agent, if someone offered me $10 million for an hour of work,
I would work that hour and then stop working.
Remember the concept of ceteris paribus.
I can’t suddenly change what I would need to never work again as that would change the
constant value we established earlier.
If someone offered me $1 million for an hour of work, I would work 10 hours and stop working.
Also, if someone offered me $100 million for an hour of work, I would work 6 minutes and
stop working.
Now let’s try and understand this graphically.
When setting up the individual’s supply curve for labour, we first draw our axes.
The y-axis is the wage rate and the x-axis is the number of hours worked.
Next we introduce an upward sloping supply curve and label it S.
However, something interesting happens next.
The supply curve eventually bends backwards.
Let me explain why that is.
You may be wondering why this happens.
Let’s take some imaginary worker named David.
At wage rate W1, David has decided it is more worthwhile to work than enjoy his leisure
time.
As he approaches W2 he continues to substitute work for leisure in the pursuit of a higher
income.
Above W2, increases in David’s wage actually results in less work being offered as he starts
to value leisure time more than work.
In order to understand this we have to revisit the income and substitution effects.
The income effect can be positive or negative.
A positive income effect would result in a worker increasing the amount of labour they
offer as the wage rate rises.
A negative income effect would result in less time being offered.
Remember, we’re operating under the assumption that there is a set level of income this individual
is seeking to earn.
The substitution effect will always be positive.
As the wage rate increases, so does the opportunity cost of enjoying leisure time.
As a result, higher wage rates encourage workers to offer more labour.
In this wage range (W1 to W4) both effects are positive, resulting in more time being
offered for work.
From W4 to W2 the substitution effect is positive, but the income effect is negative.
However, as the substitution effect is greater, the individual increases their hours worked
as wages increase towards W2.
Beyond W2, the income effect is negative as the substitution effect continues to be positive.
However, at this point the income effect is greater.
As wages rise above W2 the worker chooses to work less as opposed to work more as wages
rise.
To recap, above W2 the negative income effect dominates the positive substitution effect.
Below W2 the positive substitution effect dominates the negative income effect when
it occurs.
This slide brings all this information together.
I’d encourage you to copy this as you see it, or even take a screenshot and add it to
your notes.
This concept is a difficult one to grasp but after reviewing this video you should have
developed a better understanding of the individual’s supply curve of labour.
If you’re confused or need some clarification, leave a comment or message below and we can
try to answer your question together.
That’s us done for now and I will see you in the next one!