Question

What is the reason for the backward bending labour supply curve?

Hint:

At higher wages, the income effect leads workers to choose more leisure time, causing the labor supply curve to bend backward.

Answer 1

Step 1: Defining the Labour Supply Curve:
The labor supply curve shows the relationship between the wage rate and the quantity of labor that workers are willing to supply. Typically, the labor supply curve slopes upward, meaning that as the wage rate increases, more workers are willing to work. However, in some cases, the labor supply curve may bend backward at higher wage rates.
Step 2: The Backward Bending Labour Supply Curve:
The backward bending labor supply curve occurs when workers decide to work fewer hours as the wage rate increases beyond a certain point. At low to moderate wage rates, an increase in the wage rate will encourage more workers to supply more labor. However, at higher wage rates, the income effect (the desire to enjoy more leisure) outweighs the substitution effect (the desire to earn more income), leading workers to reduce the number of hours worked.
Step 3: Key Reasons for the Backward Bend:
- Substitution Effect: As wages rise, work becomes more attractive relative to leisure, so workers are willing to work more hours.
- Income Effect: As wages rise significantly, workers feel wealthier and may choose to enjoy more leisure, reducing their hours of work.
Step 4: Final Conclusion:
The backward bending labor supply curve occurs when the income effect outweighs the substitution effect, leading workers to supply less labor at higher wage rates. This is because they prefer more leisure time as their income rises.