Dominance of the Substitution Effect on Labor Choice
Following a wage increase, it is possible for the substitution effect to outweigh the income effect. This occurs when the incentive to work more, created by the higher opportunity cost of free time, is more influential than the desire to use increased income to 'purchase' more leisure. The result is that the individual chooses to work longer hours.
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Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.3 Doing the best you can: Scarcity, wellbeing, and working hours - The Economy 2.0 Microeconomics @ CORE Econ
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Income Effect
Substitution Effect
Activity: Disentangling Income and Substitution Effects of a Wage Rise
Dominance of Income or Substitution Effect Determines the Net Effect of a Wage Rise
Further Reading on the Mathematics of Consumer Choice
Key Sources for Historical Analysis of Work-Leisure Choices
Applying the Wage Effect Model to Explain Historical Labor Trends
Explaining Historical Labor Trends
An individual experiences a significant increase in their hourly wage. If the effect of the higher opportunity cost of free time on their choices is stronger than the effect of their increased overall purchasing power, what will be the most likely change in their behavior?
Analyzing Worker Responses to a Wage Increase
Policy Impact on Work-Leisure Choice
Following a wage increase, an individual's decision about how many hours to work is influenced by two opposing effects. Match each effect to its underlying cause and the behavioral incentive it creates.
Following an increase in an individual's hourly wage, the resulting 'income effect' and 'substitution effect' both create an incentive for the individual to work fewer hours.
A freelance software developer who was previously earning $50 per hour finds a new client who pays them $100 per hour for all the hours they are willing to work. After this change, the developer decides to reduce their working hours from 40 hours per week to 30 hours per week to spend more time on personal projects. Which of the following statements best explains the developer's decision?
Explaining Varied Worker Responses to a Wage Increase
Evaluating Employee Incentive Strategies
Analyzing Employee Overtime Decisions
Dominance of the Income Effect on Labor Choice
Dominance of the Substitution Effect on Labor Choice
Figure 3.16: Modeling US Work-Leisure Choices (1900 & 2020)
Learn After
Analyzing a Change in Work Hours
An accountant receives a significant promotion that doubles her hourly wage. Surprisingly to her friends, she decides to cancel her planned long vacation and instead begins working 10 extra hours per week. Which economic principle best explains her decision?
A rational individual will always choose to work fewer hours after receiving a substantial wage increase, as they can maintain their previous level of consumption with less work.
Explaining an Increase in Work Hours
Match each description of a worker's decision-making process after a wage increase to the economic principle it best represents.
Evaluating a Policy on Overtime Pay
An architect's hourly wage increases from $50 to $75. In response, she reduces her workweek from 40 hours to 35 hours. A year later, her wage increases again from $75 to $100 per hour. This time, she increases her workweek from 35 to 38 hours. Which of the following statements provides the most accurate analysis of the architect's changing labor decisions?
A city-wide minimum wage is increased by 20%. Four individuals are affected by this change. Based on the principles of labor-leisure choice, which of the following individuals is most likely to increase their number of work hours in response to the wage hike?
Analyzing Labor Choices by Income Level
Analyzing a Freelancer's Work-Leisure Decision