In the traditional Law of Resource and Demand, if the purchase price increases, the resource will also increase. But it may actually have the opposite influence on the labour source if there is a backward bending supply of labour. That's, increase in income intends to improve the way to obtain labour. This essay will concentrate on the reason that causes the supply of labour bends backward by focusing on income impact and substitution result. The essay first of all explains the reason why increase in wage intends to increase the way to obtain labour. The debate bears out by observing way to obtain labour as the contrary of leisure demand and wage as the price tag on leisure. That is, explanation of the backward bending way to obtain labour can covert to illustration of the upwards sloping demand of leisure. It then illustrates some assumptions of the backward bending way to obtain labour. The essay finally talks about the applications of the backward bending supply of labour. Additionally, the discussion of the essay also addresses different thoughts of scholars on the applications of the backward bending supply of labour.
Explanation of the Backward Bending Way to obtain Labour
Labour resource curve has a definite attribute that it has a backward-bending part. If the wage is low, as wages rise, the individual will be drawn to higher salary and then reduce time for leisure, so labour source increases. At this stage, the labour source curve is rightward sloping. However, the appeal of the higher wage is limited. When wages rises to a certain limit, the labour resource does not increase but reduce. Thus, the labour source is going to flex backward.
Why does the labour source curve flex backward? To answer this question, this essay considers the labour source, wage, and the relationship between them from a different perspective. For that, the upsurge in labour source means less demand for leisure if time a day is bound, and vice versa. There is an opposite changes between labour source and leisure demand. Second, salary actually is the ability cost of leisure. So wage can be seen as the price tag on leisure. Therefore, the explanation of the backward bending way to obtain labour can be carried out by detailing why the demand of leisure is upwards sloping.
Demand for leisure goods is afflicted by two aspects which are the substitution result and the income result. Demand for leisure has reverse changes with the price of leisure because of the substitution effect. If the price of leisure rises, leisure will certainly are more expensive than other commodities, which does mean that the chance cost of leisure increase. As a result, the individual would want less leisure to check out other substitutions instead. However, demand for leisure gets the same changes with the price of leisure when considering the income result. Upsurge in leisure price means that the actual income is raised, since the person will get more money with the same level of labour resource, which is to state, he can work fewer hours to keep up the same consumption patterns of goods and services. Considering both of the substitution result and the income impact, the change of demand for leisure with the increase in wage is determined by the power of the two effects. Since the majority of the individual's income probably originates from his labour source, that increase in wage will increase, ceteris paribus, the income of the average person incredibly. Thus the income effect from the changes of leisure price is a lot greater. If wage is ready on an increased level with much larger size of labour supply, increase in income will lead to significant upsurge in labour income. Because of this, the income effect dominates the substitution result which makes the way to obtain labour bends backward.
In short, income raises that can make the individual well off to a certain degree, so he'll prefer more leisure time. Therefore, when wage reaches a certain level and continues to boost, the individual's labour supply does not increase but reduce. That's the reason why the supply of labour bens backward.
Assumptions of the Backward Bending Way to obtain Labour
The backward bending supply of labour is based on some important assumptions. Firstly, the way to obtain labour being talked about above targets the individual scale, though it offers three different scales: the average person, the industry and the overall economy level (Wallace and Myles S. , 1981). This is because that the average person can handle his working time freely regarding to his interest. Besides, working time and work effort are treated as a similar thing.
Secondly, work can be an poor good with vulnerable elasticity. This implies, there is an opposite changes in the demand of labour and the income. Leisure is the substitution of labour. Thus, wage can be viewed as the price tag on leisure. Since the individual intends to increase his energy within a fixed number of time (only 24 hours a day). So, the individual has to determine the hours allocated to work and the time spent on leisure, which is so called opportunity cost of leisure. Then your utility he gains from buying goods with the income he earns in the last hour will equal the utility he would get from the previous hour of leisure time.
Finally, the income effect of a higher wage is more powerful than the substitution impact. A growth in wage can be regarded as generating both money effect and a substitution result (T. Aldrich Finegan, 1994). With all the substitution result, when wage raises, the individual will spend additional time in work, and the labour resource increases. While using income impact, when wage rises, meaning the individual is way better off, and he'll actually provide less working time, thus the supply of labour decreases. Moreover, the majority of the individual's income probably originates from his labour source. Under this circumstances, increase in income will raise the income of the individual remarkably. As a result, the income impact dominates the substitution result. However, Chung-cheng Lin (2003) performed that the supply of labour would flex backward in the lack of an income effect. It is because that working hours and work effort are cured as distinct variables which differs from the traditional assumptions that see them being the same thing. An increase in wage will increase two immediate substitution results that motivate the given individual to provide more effort and hours. When the work effort is better enough to reduce the working hours, the way to obtain labour may bend backward without the income effect.
Applications of the Backward Bending Way to obtain Labour
Based on these assumptions, the backward bending supply of labour is "widely considered appropriate specifically labour markets in any market" (Harold G. Vatter, 1961, p. 579). The backward bending way to obtain labour pertains to nearly all kinds of labour which sensation is worldwide (P. J. D. Wiles, 1962). There was a backward sloping supply curve of labour in Africa for that Africans were logical and wanted to maximize their individual welfare (Elliot J. Berg, 1961). Especially, in small farms where labour performs a larger part in the farmer lives, the use of backward bending supply of labour is more evident (Kenneth Boulding, 1955). For instance, at the start of Industrial Trend lately 1900s, many farmers do spinning and weaving at home to generating more money, so at that time, there was a great increase in their income and earnings. Therefore, the high level of income made many farmers to minimize their time for work so as to enjoy more free time. This empirical experience can confirm that the supply of labour is backward bending (Karl E. Circumstance, Ray C. Rational and Sharon Oster, 2008).
However, some scholars kept different thoughts on the application of the backward bending way to obtain labour. The backward bending supply of labour signifies that, at lower wage, the way to obtain labour will lower as income declines. The American experience from the 1970s to the mid-1990s, does not support it (Robort E. Prasch, 2000). With the, during these cycles, wage was dropping or stagnating, however the labour resource actually increased. Actually, aside from the individual' desire for his paid holiday seasons and paid vocations there is no facts in recent experience that he needs shorter working time (T. Aldrich Finegan, 1994).
In final result, under certain assumptions, there is a backward bending supply of labour showing that whenever wage increases, the way to obtain labour may actually also increase, which is reverse to the effect in traditional Laws of Resource and Demand. The explanation of the backward bending way to obtain labour can be done with the illustration on the upwards sloping leisure demand. It really is mainly the actual fact that the income impact generated by higher-level of wage is stronger than the substitution result causes the way to obtain labour bending backward. However, the backward bending supply of labour is dependant on some important assumptions, such as individual level of labour supply, substitution between labour and leisure, significant income effect and so on. In addition, the backward bending supply of labour is applicable under these assumptions. It is widely accepted that there surely is a backward bending way to obtain labour in Africa and in small farms through the early times of the Industrial Trend. However, there's also some disagreements on request of the backward bending supply of labour.
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