Question

If the wage elasticity of labor supply is negative, what can we say about the slope of the labor supply curve and the relative sizes of the income and substitution effects? Is leisure a normal or inferior good in this case? Will a fall in the tax rate on earnings increase or decrease tax revenues?

Answer 1

wage elasticity of labor supply = %change in labor supply/%change in wages = change in labor supply with the change in wages.

If it is negative then the supply decreases with increase in wage. In such a case, labor supply curve whose slope is given by wage elasticity of labor supply value will be negative=> downward slope.

As income rise, you wll work less hours but also substitute less because the opportunity cost has increased. If there is negative wage elasticity, Income effect will dominate.

Leisure is a normal good as leisure will be preferred over work when wages are increasing. (leisure demand is increasing)

As there will be decrease in labor supply with increase in wage(tax cut leads to positive impact on wage), the tax revenues will fall.