The income effect and the substitution effect associated with a wage increase influence workers in the same direction.

Question

Quizplus · Accepted Answer

The income effect of a wage increase leads workers to desire more leisure (since they can maintain the same standard of living with less work), potentially reducing labor supply, while the substitution effect makes leisure more expensive relative to work, encouraging more labor supply. These effects work in opposite directions.

The Income Effect and the Substitution Effect Associated with a Wage