The substitution effect for labor supply states that people work less as wages rise because their ability to purchase goods increases.

Question

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The substitution effect for labor supply actually suggests that as wages rise, people will work more because the opportunity cost of not working (i.e., the income forgone by enjoying leisure time instead) increases. This effect competes with the income effect, which might lead people to work less as they need less work to maintain their standard of living.

The Substitution Effect for Labor Supply States That People Work