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and their wage goes
up, they'll work less.
Now, that's not necessarily
the truth.
But it's, at least to me, sort
of a plausible case of how
people might behave. And that's
a case where income
effects can dominate.
So if we, once again, go to the
second chart on that page,
now we see the income
and substitution
effects for labor supply.
Once again, we're assuming
leisure is a normal good.
We're always going to assume
leisure is a normal good.
We're never going to assume
people don't like leisure.
Assuming leisure is a normal
good, then as the wage rises,
the substitution effect is
you take less leisure.
This table is a bit different
than the other table.
Instead of the first panel being
normal and the second
panel being inferior,
the first panel is
what happens to leisure.
The second panel converts it
to what happens to labor.
So for instance, in the first
cell, when the wage rises, the
substitution effect on leisure
is unambiguously negative.
You clearly take less leisure
when the wage rises.
So, likewise, you
have more labor.
So on the bottom panel, labor
is clearly greater than or
less than 0.
But the income effect is
positive for leisure.
You're rich, you take
more leisure.
Or, likewise, negative for
labor, you're richer, so your
work less hard.
And, therefore, the
net is ambiguous.
So with goods consumption, we
needed goods to be inferior
for there to be a Giffen
good type phenomena.
Here, even with leisure being
normal, you can have a Giffen
good type phenomena.
It's much less random.
And, in some sense, this
is why we learn income
substitution effects.