[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

“standard” workweek—the 40-hour week that has become the 35-hour week—
respond over time to the attitudes (preferences) of workers.
We now apply the analysis of Chapter 5 to an individual’s choice between work
and leisure. Figure 8.1 shows the budget constraint of Steve, who earns an hourly
wage of $7. Accordingly, for each hour less of leisure Steve enjoys—for each extra hour
he works—he earns $7 more. That is, his consumption increases by $7. Underlying
this budget constraint is his time constraint. He has only so many hours a day, say
16, to spend either working or at leisure. For each extra hour he works, he has 1 less
hour of leisure. If he works 1 hour, his income is $7; if he works 2 hours, his income
is $14; and so forth. If he works 16 hours—he has no leisure—his income is $7 × 16 =
$112. The trade-off between income and leisure given by his budget constraint is
$7 per hour.
Steve will choose a point on the budget constraint according to his own preferences,
just as a consumer chooses between two goods (see Chapter 5). Let’s suppose that
he chooses point E 0 . At E 0 he has 10 hours of leisure, which means that he works
6 hours out of the total available time of 16 hours. His income is $42 per day.
In deciding which of the points along the budget constraint to choose, Steve
balances the marginal benefits of what he can buy with an additional hour’s wage
against the marginal costs—the value of the hour’s worth of leisure that he will have
to forgo. Steve and his brother, Jim, assess the marginal benefits and marginal costs
differently. Steve chooses point E 0 , while his brother chooses point E 1 . Jim values
the material things in life more and leisure less.
For Steve, at E 0 , the marginal benefit of the extra concert tickets or
other goods he can buy with the money he earns from working an extra
hour just offsets the marginal costs of that hour—the extra leisure he has
to give up. At points to the left of E 0 , Steve has less leisure (so the marginal
value of leisure is greater) and he has more goods (so the marginal value of
the extra goods he can get is lower). The marginal benefit of working less
exceeds the marginal costs, and so he works less—he moves toward point
E 0 . The converse arguments apply to Steve’s thinking about points to the
right of E 0 .
We can apply the same kind of reasoning to see why the workaholic Jim
chooses a point to the left of E 0 . At E 0 , Jim values goods more and leisure
less. The marginal benefit of working more exceeds the marginal costs. At
E 1 , the marginal benefit of working an extra hour (the extra consumption)
just offsets the marginal costs.
We can use this framework to derive a labor supply curve that shows the
quantity of labor supplied at different wages. Changes in wages have both
an income effect and a substitution effect. An increase in wages makes individuals
better off. When individuals are better off, they purchase more of
all goods. One of the “goods” they will want more of is leisure, so they work
less. This is the income effect. But an increase in wages also changes the
trade-offs. By giving up one more hour of leisure, the individual can get
more goods. Because of this, individuals are willing to work more. This is
the substitution effect.
When we looked at the case of a typical good in Chapter 5, we saw that
the income and substitution effects reinforce each other. A higher price
CONSUMPTION ($)
112
42
14
7
0
E 1
FIGURE 8.1
Steve’s
leisure time
Jim’s choice
Budget constraint
–Slope = 7
10
E 0
LEISURE (HOURS)
Steve’s choice
14 15 16
Steve’s
labor time
A BUDGET CONSTRAINT BETWEEN
LEISURE AND INCOME
Individuals are willing to trade leisure for an increase
in income, and thus in consumption. The budget
constraint shows Steve choosing E 0 , with 10 hours
of daily leisure, 6 hours of work, and $42 in daily
wages.
THE LABOR SUPPLY DECISION ∂ 177