Question

6. (8 marks) A wage change has two effects on labour supply. What are these two effects and why do they alter the optimum hours of work? Under what condition an individual's labour supply curve bends backward at a high wage rate? 7. (7 marks) Suppose there are two types of jobs in the labour market: clean' jobs and 'dirty' jobs. Describe how the worker decides whether to accept a clean job or a dirty job. How is the market equilibrium compensating wage differential between clean jobs and dirty jobs determined?

Answer 1

6)The two effects on labour supply are income effect of rise in wages and substitution effect of rise in wages.

Substitution effect-When wages increase ,workers prefer work to leisure .When work is more profitable, the opportunity cost of not working is high, So workers will prefer to work for more hours.  

income effect -with increase in wages workers prefer to work for less hours because they get more wages even if they work for few hours.

At a higher wage rate, the individual will prefer leisure to work because they get more wages by working for fewer hours. So the labour supply curve will bend backwards. Upto certain level substitution effect is greater and so workers prefer to work for more hours but after sometime income effect will be more than substitution effect and so workers prefer leisure to work and supply curve will bend backward.

7)Dirty and clean jobs may refer to long and short hours of jobs or jobs which require physical exertion and jobs which do not require physical exertion respectively.Suppose there are two groups of workers and one group does not like dirty job more than the other group,but with compensating wage differential, each group will be more than willing to take up dirty job.

There may be different wages for dirty jobs and clean jobs but there will be a single equilibrium wage in each market. However depending on the type of job, there may not be any wage difference between the two groups and equilibrium will be efficient