February 10, 2004

Backward Bending Labor Supply

The labor supply curve can be derived from the labor-leisure tradeoff, which is another version of the two goods - two prices diagram. In this case, the two goods are leisure and consumption.

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The backward bending phenomenon could also occur for a worker at low wage rates. In this diagram, a worker chooses to work more hours when his wage rate is cut.

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The classic welfare analysis is a natural extension of this discussion.

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The welfare problem is that, if you take away the welfare payment if a person has any income, then there is an incentive not to work at all. If you let people keep the welfare plus whatever they make, they will work.

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New problems now present themselves. Everybody will want to receive the welfare payment, and giving welfare to people who work (possibly alongside people who do not get the welfare payment) is politically difficult.

Posted by bparke at February 10, 2004 10:48 PM