Chapter 20: Backward-bending Labour Supply Curves
John E. King The backward-bending labour supply curve is a staple feature of labour economics textbooks (Borjas 2005, Figure 2.11b, p. 44), and is also found both in advanced handbooks on labour market theory (Killingsworth 1983, Figure 1.5, p. 13) and in introductory principles texts (Samuelson and Nordhaus 1998, Figure 13–4, p. 229). It is derived from a simple application of neoclassical consumer theory to the individual’s labour supply decision. In Figure 20.1A, the individual has to choose between two goods, leisure and income. Leisure is measured in hours per day; the term is used to denote all uses of time other than paid work. Income represents all other goods; it is obtained by supplying hours of labour (non-leisure) in return for a wage. The individual’s preferences are illustrated by the indifference curves in Figure 20.1A, which take the standard form: they are downward-sloping, convex to the origin (since the marginal rate of substitution of income for leisure declines as income increases), and do not touch either axis (‘man cannot live by leisure – or income – alone’). The budget constraint is illustrated by the straight lines DA, DB and DC, with a slope equal to the hourly wage rate (Ow1, Ow* and Ow2). The vertical intercept shows the income that individuals would earn if they took no leisure and worked for 24 hours a day, while the horizontal intercept shows that zero work means zero income. The analysis can be made more realistic, and the diagram very much more complicated,...
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