Introduction to Consumer Choices

Read all the sections in this chapter for information on consumer choice, including utility, consumer equilibrium, consumer equilibrium demand, consumer surplus, budget constraint, and consumer equilibrium and indifference curves.

4. Labor-Leisure Choices

4.2. Applications of Utility Maximizing with the Labor-Leisure Budget Constraint

The theoretical insight that higher wages will sometimes cause an increase in hours worked, sometimes cause hours worked not to change by much, and sometimes cause hours worked to decline, has led to labor supply curves that look like the one in Figure 6.7. The bottom-left portion of the labor supply curve slopes upward, which reflects the situation of a person who reacts to a higher wage by supplying a greater quantity of labor. The middle, close-to-vertical portion of the labor supply curve reflects the situation of a person who reacts to a higher wage by supplying about the same quantity of labor. The very top portion of the labor supply curve is called a backward-bending supply curve for labor, which is the situation of high-wage people who can earn so much that they respond to a still-higher wage by working fewer hours. Read the following Clear It Up feature for more on the number of hours the average person works each year.

The graph shows that the labor-leisure budget constraint can be influenced in several ways based on higher wages and the numb

Figure 6.7 A Backward-Bending Supply Curve of Labor The bottom upward-sloping portion of the labor supply curve shows that as wages increase over this range, the quantity of hours worked also increases. The middle, nearly vertical portion of the labor supply curve shows that as wages increase over this range, the quantity of hours worked changes very little. The backward-bending portion of the labor supply curve at the top shows that as wages increase over this range, the quantity of hours worked actually decreases. All three of these possibilities can be derived from how a change in wages causes movement in the labor-leisure budget constraint, and thus different choices by individuals.

Clear It Up

Is America a nation of workaholics?

Americans work a lot. Table 6.8 shows average hours worked per year in the United States, Canada, Japan, and several European countries, with data from 2013. To get a perspective on these numbers, someone who works 40 hours per week for 50 weeks per year, with two weeks off, would work 2,000 hours per year. The gap in hours worked is a little astonishing; the 250 to 300 hour gap between how much Americans work and how much Germans or the French work amounts to roughly six to seven weeks less of work per year. Economists who study these international patterns debate the extent to which average Americans and Japanese have a preference for working more than, say, Germans, or whether German workers and employers face particular kinds of taxes and regulations that lead to fewer hours worked. Many countries have laws that regulate the work week and dictate holidays and the standards of "normal" vacation time vary from country to country. It is also interesting to take the amount of time spent working in context; it is estimated that in the late nineteenth century in the United States, the average work week was over 60 hours per week - leaving little to no time for leisure.

Country Average Annual Hours Actually Worked per Employed Person
United States 1,824
Spain 1,799
Japan 1,759
Canada 1,751
United Kingdom 1,669
Sweden 1,585
Germany 1,443
France 1,441

Table 6.8 Average Hours Worked Per Year in Select Countries

The different responses to a rise in wages - more hours worked, the same hours worked, or fewer hours worked - are patterns exhibited by different groups of workers in the U.S. economy. Many full-time workers have jobs where the number of hours is held relatively fixed, partly by their own choice and partly by their employer's practices. These workers do not much change their hours worked as wages rise or fall, so their supply curve of labor is inelastic. However, part-time workers and younger workers tend to be more flexible in their hours, and more ready to increase hours worked when wages are high or cut back when wages fall.

The backward-bending supply curve for labor, when workers react to higher wages by working fewer hours and having more income, is not observed often in the short run. However, some well-paid professionals, like dentists or accountants, may react to higher wages by choosing to limit the number of hours, perhaps by taking especially long vacations, or taking every other Friday off. Over a long-term perspective, the backward-bending supply curve for labor is common. Over the last century, Americans have reacted to gradually rising wages by working fewer hours; for example, the length of the average work-week has fallen from about 60 hours per week in 1900 to the present average of less than 40 hours per week.

Recognizing that workers have a range of possible reactions to a change in wages casts some fresh insight on a perennial political debate: the claim that a reduction in income taxes - which would, in effect, allow people to earn more per hour - will encourage people to work more. The leisure-income budget set points out that this connection will not hold true for all workers. Some people, especially part-timers, may react to higher wages by working more. Many will work the same number of hours. Some people, especially those whose incomes are already high, may react to the tax cut by working fewer hours. Of course, cutting taxes may be a good or a bad idea for a variety of reasons, not just because of its impact on work incentives, but the specific claim that tax cuts will lead people to work more hours is only likely to hold for specific groups of workers and will depend on how and for whom taxes are cut.