Backward-Bending Labor Supply Curve
What is Backward-Bending Labor Supply Curve?
The backward-bending labor supply curve shows hours worked rising with wages at first, then falling once the income effect of higher wages outweighs the substitution effect.
A wage increase has two opposing effects on an individual's hours. The substitution effect makes leisure more costly (forgone wages), encouraging more work; the income effect makes the worker richer, encouraging more leisure. At low wages the substitution effect dominates and the curve slopes up, but at high wages the income effect can dominate, so further raises lead to fewer hours and the curve bends backward.
Backward-Bending Labor Supply Curve: a worked example
Priya is a freelance illustrator who picks her own hours. At $20 an hour she works 40 hours a week and takes home $800. Raise her rate to $30 and she works 46 hours for $1,380: an hour of leisure now costs her $30 to enjoy, so she substitutes toward work. Raise it again to $60 and she cuts back to 38 hours, earning $2,280. She has bought back 8 hours of her week compared with the $30 rate while still earning $900 a week more. Her supply curve slopes upward between $20 and $30 and turns back somewhere between $30 and $60.
The mistake students make with backward-bending labor supply curve
The common overreach is applying the bend to a whole market, concluding that a higher wage would shrink an industry's labor supply. The bend belongs to one person's hours decision. Market supply to an occupation keeps sloping upward, because a raise also pulls in workers from other jobs and from outside the workforce, an entry margin Priya does not have when she is only choosing how many hours to bill.
Backward-Bending Labor Supply Curve questions
Why does the labor supply curve bend backward?
The labor supply curve bends backward when the income effect of a raise overtakes the substitution effect. A higher wage makes every hour of leisure more expensive, which argues for working more, but it also makes the worker better off at any number of hours, which argues for taking more leisure. At low wages the first force wins and hours rise; once earnings are comfortable, the second can win and hours fall.
What is the difference between the income and substitution effect of a wage increase?
The substitution effect of a wage increase is the pull toward more hours, because every hour of rest now costs more in forgone pay. The income effect is the pull toward fewer hours, because the raise leaves the worker better off at any number of hours and leisure is something people buy more of as they get richer. So long as leisure is a normal good the two pull in opposite directions, and the shape of the labor supply curve records which one is winning at each wage.
Does the backward bend require leisure to be a normal good?
The backward bend requires leisure to be a normal good, meaning people want more of it as income rises. That is what gives the income effect its negative pull on hours worked. If leisure were an inferior good, extra income would push a worker to take less of it, so both effects would raise hours and the supply curve could never turn back on itself.
Related terms
Common comparisons
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