Dr Dénes Csala

Lecturer, Lancaster University

Visiting Assistant Professor, Babes-Bolyai University of Cluj-Napoca, Romania

Data VIsualisation Lead, Economics Observatory

Income and substitution effects on hours of work and free time

9th September 2021

Week 3
Lecture 5

ECON203
Autumn 2021

How does an increase in wages impact consumption and working hours / free time?

Income effect
Substitution effect

Overall effect

(max) consumption =
hourly wage x workhours

free time

Indifference curves

Income effect

Substitution effect

Overall effect

The income effect of a higher wage makes workers want more free time, while the substitution effect provides an incentive to work longer hours. If the income effect dominates the substitution effect, workers will prefer fewer hours of work.

Model: ideal

Reality:
trial and error

Hovering on the indifference curves, trading off working hours and income. Time really is money.

Indifference curves change over time.
Culture and politics seem to influence it.

Economics is another influence.

In the US the income effect seems to be larger than the substitution.

Effects change over time (Britain example from the book).

Conspicuous consumption: keeping up with the Kardashians