While some people have jobs with flexible hours, most Americans work between 35 and 40 hours a week, without much. leeway to increase or cut back their weekly hours. However, most people have a lot of control over how many hours they work over the course of their lifetimes. They, may decide to go to college, to retire early, or to work part time rather than full time-all of these can reduce the number of total lifetime hours worked. On the other hand, the decision to moonlight and take on a second job will increase the lifetime hours worked.
Suppose that wages rise. Will that increase or decrease the lifetime hours of work? Look at the supply curve oflabor in Figure 13-4. Note how the supph- curve rises at first in a northeasterly direction; then at the critical point C. it begins to bend back in a northwesterly direction. How can we explain why higher wages may first increase and then decrease the quantity of labor supplied? Put yourself in the shoes of a worker who has just been offered higher hourly .rates and is free to choose the number of hours to be worked.
You arc lugged in two different directions. On one side is the substitution (Chapter 5 explained that the substitution effect operates when people consume more, or substitute in favor of, a good whose relative price falls and consume less of a good whose relative price increases.) Because each hour of work is now better paid, each hour of leisure has become more expensive; you thus have an incentive to substitute extra work for leisure.
But acting against the substitution effect is the income effect. With the higher wage, your income is higher. With a higher income, you “ill want to buy more goods andservices, and, in addition, you will want more leisure time. You can afford to take longer vacations or to retire earlier than. you otherwise would. which will be more powerful, the substitution effect or the income effect? There is no single correct answer; it depends upon the individual. In the case shown in Figure 13-4, for all wage rates below poiut C, labor supplied’ increases with a higher substitution effect outweighs the income from point C upward, the income the substitution effect, and labor supplied as rates climb higher .
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