February 18, 2003

Backward Bending Labor Supply Curve

Our discussion of income and substitution effects stirred a memory of the labor-leisure diagram that show how labor supply is related to the wage rate.

The ambiguity of the direction of the income effect can, in this diagram, have the effect of making labor supply decrease when the wage rate increases. This occurs if the indifference curves put the agent at point C'.

P2180202a.jpg

Posted by bparke at February 18, 2003 12:40 PM