15.17 : Backward Bending Supply of Labor

An individual's labor supply curve illustrates how the quantity of labor supplied changes in response to variations in the wage rate.

As wages rise, the opportunity cost of leisure increases because the wage represents the income foregone by not working. This makes leisure relatively more expensive compared to goods and services, which prompts individuals to choose less leisure and work more. This behavior reflects the substitution effect, where higher wages incentivize workers to substitute labor for leisure.

In other words, the substitution effect encourages an individual to work more as their wage goes up, which generally causes the labor supply curve to slope upward.

However, an individual might not always choose to work more.

Leisure is considered as a normal good. A normal good is a good that people buy more of as their income goes up, assuming all other things remain constant. This means that if an individual earns a higher wage then the demand for leisure will rise. With higher income, an individual often desires more time to enjoy what they have earned. This leads to an income effect: the higher the wage, the more likely people are to value leisure, which they "purchase" by working fewer hours.

When the desire for leisure outweighs the incentive to earn more income, the labor supply curve bends backward. Beyond a certain wage level, individuals may prefer more leisure over additional income, leading them to work fewer hours even as wages rise. This behavior results in the characteristic backward-bending individual labor supply curve.

It is important to note that, unlike the individual labor supply curve, the market labor supply curve typically slopes upward.