Question

What does it mean to say the labor supply is backwards bending? How does this relate to the direction and magnitude of the income and substitution effects? Will the labor supply be backwards bending ?

Answer 1

The term “backward-bending” labor supply curve refers to a situation where as the wage rate increases, the quantity of labor supplied initially increases, but then decreases at higher wage rates. This means that workers may choose to work less as a result of higher wages.

Step-by-step explanation:

The term “backward-bending” labor supply curve refers to a situation where as the wage rate increases, the quantity of labor supplied initially increases, but then decreases at higher wage rates. This means that workers may choose to work less as a result of higher wages. The direction and magnitude of the income and substitution effects determine the shape of the labor supply curve. When the substitution effect is larger than the income effect, the labor supply curve has its normal upward-sloping shape. However, if the income effect outweighs the substitution effect, it can result in a backward-bending labor supply curve.