Explain how an increase in the wage can potentially decrease the amount that a pe
Explain how an increase in the wage can potentially decrease the amount that a person wants to work.
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Due to higher wages, the substitution effect induces an individual to work for more hours while the income effect induces the individual to work for less hours.
When the wages rise, leisure becomes more expensive to the consumer than work hours. Thus, according to the substitution effect, when leisure becomes expensive due to rise in wages, workers would want to get more labor and less lesures.
At the same time, due to a rise in wages, the consumer moves to a higher indifference curve. Since both consumption and leisure are normal goods, the consumer would want to enjoy higher quantities of both. This is the income effect, which leads the consumer to work for less hours and enjoy more leisure.
Thus, an increase in wages can induce an individual to work for less hours when the income effect outweighs the substitution effect.
After the increase in wages, the individual will want to get more leisure hours due to the income effect since she/he can earn the same amount by working fewer hours. Whereas, due to the substitution effect, the individual will want to get less leisure hours since the person can earn more by working more.
The increase in wages will lead an individual to work for less hours and enjoy more leisure hours if the income effect outweighs the substitution effect.