Work or Leisure – Comparative Statics of Labor Supply

Work or Leisure – Comparative Statics of Labor Supply 

Xianger, Shelley, Lady, and Delia

We’ve already talked about opportunity cost and consumer’s decision. The opportunity cost of leisure is the wage rate, which means people need to decide how they want to distribute their time between work and leisure. We’re going to talk about the tradeoff between labor and leisure that lies behind the graph.

The following assumption is based on the situation of a Mount Holyoke student named Anna. Anna receives a generous financial aid package from the college. She starts her first year in college with an endowment. However, as a requirement for work-study, she has to work in Dining Services her first year. The wage of this Level 1 job is $8 per hour. The money she earns comes from her work-study package, so she can spend the money as she wishes. She has the possibility of working 10 hours/week to earn $80 weekly. During her first year, Anna has to work but she can also afford some leisure time.

When Anna becomes a sophomore at Mount Holyoke College, she receives the same financial aid package as in her first year. She applies and gets a job as a Career Center Peer Advisor, which pays $8.70 an hour. Anna is faced with two choices. She could work the same amount of hours as she did in her first year as a Dining Services worker. Working the same amount of hours, she would still earn more because the wage at her new job is higher. On the other hand, she could choose to work more hours because the wage has gone up.  Anna decides to work more hours than she did last year precisely because her wage has increased. Her wage has increased but not to the point where she wants to work less. The substitution effect is stronger because labor goes up and the opportunity cost of leisure increases. At this point, leisure becomes more expensive than labor, so she wants to consume less leisure in order to make more money.

Anna starts her junior year at Mount Holyoke with the same financial aid package and an internship at a law firm in the town of Amherst. Her wage at the law firm is $20 an hour. She also stops working as a Career Center Peer Advisor. Anna has the choice to work more at the internship to earn a higher income or she could choose to work a decent amount since now she has additional income for all the hours she is working. By acquiring a job with an increased wage, the return from working additional hours and the opportunity cost of leisure both increase. If the substitution effect is stronger, Anna would want to increase her consumption since leisure will become more expensive (wages lost as the price of leisure). The higher wage at the internship gives her large incentive to work more hours. However, Anna does not need a large amount of money to live as a college student at Mount Holyoke. She is limited because she cannot choose to be a full time worker since this will come at the expense of her being a full time student. Additionally, choosing to work more hours will take time away from her schoolwork and social activities since she has to factor in transportation costs. It takes 50 minutes to get to her internship and back with the PVTA that takes her from Mount Holyoke College to the town of Amherst. She decides to work less hours a week at the internship than the amount she worked at her career center job on campus. Since the internship affords her more time while working less hours, the income effect starts to outweigh the substitution effect. Since Anna is now receiving a substantially higher wage, she is going to choose to use her income to purchase additional leisure time. The substantial increase in her wage reduces the supply of labor.

In conclusion, Anna begins her college education with an endowment due to her financial aid package. As the total wage she receives from either on-campus or off-campus job increases, her decision changes from work more in order to get more consumption to work less in order to enjoy more leisure. Her supply curve of labor bends backward as the wage goes up.