Income And Substitution Effect Wage Rise

When leisure is a normal good the substitution effect and the income effect work in opposite directions.

Income and substitution effect wage rise. Income effect the substitution effect of higher wages means workers will give up leisure to do more hours of work because work has now a higher reward. So whether leisure demand increases or not depends on which effect is stronger. When higher wages cause people to want to work more hours in order to reach a target desired income. A s income effect outweighs the substitution effect the total effect of wage rise on leisure is positive n 2 n 1 and h 2 h 1.

A change in the wage rate has both an income effect and a substitution effect. A worker decides to work less and takes more free. Would it just be the opposite i e. The opportunity cost of taking leisure is the monetary value of the wages foregone.

If wages increase then work becomes relatively more profitable than leisure.