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Additional info for Contemporary Labor Economics
This means that when wage rates rise, and leisure is a normal good, the income effect reduces the desired number of hours of work. 5 In the context of a wage rate increase, it evidences itself in an increase in the desired number of hours of work. When the wage rate increases, the relative price of leisure is altered. Specifically, an increase in the wage rate raises the “price” or opportunity cost of leisure. Because of the higher wage rate, one must now forgo more income (goods) for each hour of leisure consumed (not worked).
At this particular wage rate, the value of work and the value of nonmarket time (leisure) are equal. If the market wage is below the reservation wage, the individual will clearly choose to be a nonparticipant. The relatively low market wage rate embodied in the NW segment of the HNW budget line demonstrates this decision not to be in the labor force. In nontechnical terms, at point N the value of nonmarket time to this individual exceeds the value of work, and therefore this person’s well-being would be reduced by working.
Downy quickly grabs an opportunity for early retirement; Wong plans to work until she can no longer do so because of old age. Evans welcomes overtime work; Ebert, given an option, routinely rejects it. Fleming supplies more hours of labor when her wage rate rises; Hernandez cuts back on his work hours. How are these diverse labor supply decisions made? How do individuals decide on the number of hours of labor, if any, to supply in the labor market? Our main goal in this chapter is to develop and apply a basic theory of individual labor supply that will help answer these questions.