Question

what is the income effect when studying the supply of labor?

Answer 1

If leisure is a normal good then demand for it increases as income rises and this increase in income tends to make workers supply less labour so they can "spend" the higher income on leisure and this is called the income effect of labour supply.the supply of labour curve depends on the income and substitution effect. even the shape of the labour curve changes according to the income and substitution effect. as long as substitution effect dominates income effect labour supply curve slopes upward, and from the point where the income effect starts to dominate substitution effect the labour supply curve bends backward. income effect