The Labour-Leisure Choice

How economists model people's decisions about how many hours to work, and why a wage rise can lead some people to work less.

People decide not only what to buy, but also how much to work. Economists model this as a choice between income from work and leisure, meaning time not spent working, including rest, family time and hobbies.

The trade-off

Every hour of leisure has an opportunity cost: the wage that could have been earned. A higher wage makes leisure more expensive.

How wage changes affect hours

When wages rise, two effects operate, similar to the income and substitution effects for goods:

Substitution effect: leisure becomes more expensive relative to work, so people want to work more.
Income effect: people are richer, and since leisure is a normal good, they may want more of it, and therefore work less.

The backward-bending labour supply curve

At low wages, the substitution effect usually dominates: higher pay encourages more work. At high wages, the income effect may dominate: people who already earn a lot may choose more leisure when wages rise further. This can produce a backward-bending labour supply curve, where hours worked eventually fall as wages rise.

Evidence

Research generally finds that:

Hours worked by prime-age men respond only modestly to wage changes.
Women’s labour supply, especially married women’s, has historically been more responsive to wages.
Over history, as wages rose, average working hours in rich countries fell substantially, suggesting people took part of their rising prosperity as more leisure.

Policy relevance

This framework helps analyse policies like income taxes, welfare benefits and minimum wages. For example, a tax cut raises take-home pay; whether people work more depends on the balance of substitution and income effects.

The taxi driver's day

A taxi driver aims to earn a certain amount each day. On a busy day with high earnings per hour, he reaches his target early and goes home. On a slow day, he works longer. Research by Colin Camerer and others on New York taxi drivers found patterns like this, suggesting some workers set income targets, which can make hours move opposite to hourly earnings.

Thinking higher wages always mean more hours worked

Higher wages encourage more work through the substitution effect, but the income effect can lead people to choose more leisure. The overall effect depends on which is stronger.

Key takeaways

People choose between income from work and leisure.
A wage rise has a substitution effect toward more work and an income effect toward more leisure.
At high wages, labour supply can bend backward as people choose more leisure.
Historically, rising wages in rich countries went with shorter working hours.