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non-labor income

We know that if non-labor income increases the hours of work will decrease, thus, What happens to hours of work when non-labor income decreases? 


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Answer #1

We are considering a scenario when non-labor income is decreasing and the hours of work are being impacted. Such an increase in non-labor income will lead to a parallel, upward shift in the budget line. This means the worker's position will change in the budget line due to a decrease in income. If leisure is an inferior good, as we are considering non-labor income and hence leisure comes into the picture, then the hours of work increase. If the Income Effect is greater than the Substitution Effect, then hours of work decrease when the wage rate rises because the income effect will shadow the substitution effect and force the labor to work a lower number of hours.

Secondly, if there is a fall in the wage rate, then the number of hours worked will change based on the income and substitution effect.

So if the decrease in wage rate decreases the leisure and it cannot be substituted then due to income effect the hour worked will increase. Whereas if leisure is substituted by a change in wage rate, then the number of hours worked will decrease.


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