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5.5 THE CHOICE OF LABOR AND LEISURE 189
THE BACKWARD-BENDING SUPPLY OF LABOR

Since a day has only 24 hours, the consumer’s choice about the amount of leisure time
is also a choice about the amount of labor he will supply. The optimal choice diagram
in Figure 5.24 contains enough information to enable us to construct a curve showing
how much labor the consumer will supply at any wage rate. In other words, we can
draw the consumer’s supply of labor curve, as shown in Figure 5.25.
The points E , F , G , H , and I in Figure 5.25 correspond, respectively, to points
E, F, G, H, and I in Figure 5.24. When the wage rate is $5, the consumer supplies
8 hours of labor (points E and E). As the wage rate goes up from $5 to $15, the labor
supply rises too—at a wage rate of $15, the labor supply is 11 hours (points G and G).
But when the wage rate continues to rise past $15, the labor supply begins to fall,
until, finally, at a wage rate of $25, the consumer works only 9 hours (points I and I).
For most goods and services, a higher price stimulates supply; in this case, however, a
higher wage rate decreases the labor supply. (Remember, the wage rate is the price of
labor.) To understand this phenomenon, which is reflected in the backward-bending
shape of the supply of labor curve in Figure 5.25, let’s examine the income and sub-
stitution effects associated with a change in the wage rate.
Look again at the optimal choice diagram in Figure 5.24. Instead of having a fixed in-
come, our consumer has a fixed amount of time in the day, 24 hours. That is why the hor-
izontal intercept of the budget line stays at 24 hours, regardless of the wage rate. An hour
of work always “costs” the consumer an hour of leisure, no matter what the wage rate is.
However, an increase in the wage rate makes a unit of the composite good look less
expensive to the consumer. If the wage rate doubles, the consumer needs to work only
half as long to buy as much of the composite good as before. That is why the vertical
intercept of the budget line moves up as the wage rate rises. The increase in the wage
rate therefore leads to an upward rotation of the budget line, as Figure 5.24 shows.
An increase in the wage rate reduces the amount of work required to buy a unit
of the composite good, and this leads to both a substitution effect and an income ef-
fect. The substitution effect on the labor supply is positive—it induces the consumer
to substitute more of the composite good for leisure, leading to less leisure and more
labor. In contrast, the income effect on labor supply is negative—it leads to more
leisure and less labor because leisure is a normal good for most people (i.e., the
consumer wants more leisure as his income rises).

Wage rate (dollars per hour) $25 I′ H′ G′ FIGURE 5.25

$20
Backward-Bending Supply
$15
of Labor
$10
F′
and I correspond, respec-
$05
tively, to points E, F, G, H,
E′ Supply of labor The points E , F , G , H ,
and I in Figure 5.24. The
0 1 2 3 4 5 6 7 8 9 10 11 supply of labor curve is
backward bending for
Hours worked per day
wage rates above $15.