Empirical evidence with respect to the labor supply decision suggests that the substitution effect seems to dominate for most people, which means that the aggregate labor supply responds ________ in the wage rate.

Question

Quizplus · Accepted Answer

When the substitution effect dominates in the labor supply decision, it implies that as wages increase, individuals are more inclined to work more because the opportunity cost of not working (i.e., the income foregone by enjoying leisure instead) becomes higher. Conversely, when wages decrease, the substitution effect leads individuals to work less because the opportunity cost of leisure is lower. Therefore, the aggregate labor supply responds negatively to a decrease in the wage rate, as people will substitute away from labor towards leisure when wages fall.

Empirical Evidence with Respect to the Labor Supply Decision Suggests