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

Wrap-Up
WAGE CHANGES AND LABOR SUPPLY
Labor supply decisions depend on the real wage—the nominal wage corrected for
the price of consumer goods.
As real wages rise, individuals become better off. This income effect induces
them to work less. Offsetting it is the substitution effect—the higher return to
working provides an incentive to work longer hours. Either effect may dominate.
Thus, the quantity of labor supplied may increase or decrease with wage
increases.
LABOR FORCE PARTICIPATION
The decision about how much labor to supply can be divided into two parts: whether
to work and, if so, how much to work. For men, the first question traditionally has
had an obvious answer. Unless they were very wealthy, they had to work to support
themselves (and their families). Accordingly, the wage at which they decided to work
rather than not to work was very low. A change in wage still does not affect the decision
of most men about whether to work. It influences only their decision about how
many hours to work, and even that effect is small.
Thinking Like an Economist
TRADE-OFFS
The relevant trade-off for deciding how much labor to supply
is that between consumption and leisure, as delineated
in the budget constraint in Figure 8.1. To gain more consumption,
you have to work more, and as a result you have to give
up leisure. To gain more leisure time, you have to give up
consumption as you work fewer hours and earn less money.
Like all trade-offs, this one reflects an opportunity cost, a
concept we introduced in Chapter 2. In the present case, the
opportunity cost of an extra hour of leisure is the consumption
you have to give up by working one hour less. Similarly, the
opportunity cost of an extra $25 of consumption is the leisure
time you have to give up to earn the extra $25.
Because the opportunity cost of leisure is the forgone consumption,
this opportunity cost depends on the wage you can
earn. If your wage is $7 per hour, the opportunity cost of an
hour of leisure is $7. If your wage is $25 per hour, the opportunity
cost of an hour of leisure is $25. So the opportunity cost
of leisure is greater for someone who earns a high wage than
it is for someone who earns a lower wage.
Another key idea to remember is that economic decisions
are determined by marginal trade-offs (see Chapter 2). If you
want to consume more, the benefit of the extra consumption
must be weighed against the (opportunity) cost of the diminished
leisure. On the basis of individual preferences for consumption
and leisure, the worker chooses the point on the
budget constraint where the marginal benefits and costs
are equal.
THE LABOR SUPPLY DECISION ∂ 179