Intertemporal substitution of labour suggests that

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Intertemporal substitution of labour refers to the change in the amount of labour supplied in response to changes in real wages over time. The substitution effect arises when a change in the relative price of leisure and consumption today versus tomorrow leads to changes in the optimal choice of hours worked. Studies suggest that the substitution effect of a permanent increase in real wages is smaller than the substitution effect of a temporary change in real wages. The reason for this is that workers can take advantage of the higher real wage today by working more and saving more for the future. As a result, the effect of higher real wages on leisure foregone is offset by the effect on consumption in the future. In contrast, a temporary increase in real wages has a stronger effect on leisure as workers cannot fully adjust their savings and labour supply in response to the change in wages.

Intertemporal Substitution of Labour Suggests That