For instance, on the planet Earth, man had always assumed that he was more intelligent than dolphins because he had achieved so much—the wheel, New York, wars and so on—whilst all the dolphins had ever done was muck about in the water having a good time. But conversely, the dolphins had always believed that they were far more intelligent than man—for precisely the same reasons. - Douglas Adams, The Hitchhiker's Guide to the Galaxy.
Time can be divided, approximately, into time spent eating, sleeping, caring for others, playing, relaxing, making love - all the things that make up "leisure" - and time spent in activities that generate things to consume, or earnings to buy things to consume. An individual faces a trade-off between leisure and consumption, as shown in the diagram below the fold:
The diagram shows a person who is endowed with 16 waking hours per day. She can choose to spend them in leisure, or she can choose to convert those hours into consumption by working. Her wage rate determines how much additional consumption she gets for each hour that she works. As drawn, our person's wage rate is 10 units of consumption per hour - for each hour she works, she gets 10 units of consumption. For example, if she has no leisure, and works 16 hours per day, she achieves 160 units of consumption.
How much a person works depends upon her preferences, which I have represented here by an indifference curve. Indifference curves map a person's wants, needs and desires. Each point on an indifference curve is just as good as any other point, but higher indifference curves are better than lower ones.
As drawn, our person's optimal choice - the one that gets her on the highest possible indifference curve - is working 12 hours per day, achieving 120 units of consumption, and having four hours left over for leisure.
However if her wage rate changed, her budget constraint would change too, and so would her optimal choice. In the second figure below, our person's wage rate has increased to 18 units of consumption per hour, rotating the budget line outwards.
In theory, the impact of an increase in the wage rate is ambiguous. Work pays better, so taking time away from work, or enjoying leisure, costs more. This means that people tend work more hours, substituting consumption for leisure - the "substitution effect". At the same time, when work pays well, one doesn't have to work so hard to get enough to eat, and instead can afford to take time off - the "income effect". Whether an increase in the wage rate increases or decreases hours of work depends upon which dominates, the income effect or the substitution effect. In the diagram above, the income effect dominates. When a person's wage increases, she works fewer hours - she has what is called a "backwards bending labour supply curve."
The phrase "backwards ending supply curve" describes what you get when you take the wage rate/hours worked combinations from the diagrams above and plot them on a graph, like this:
In my experience, students are often skeptical about the existence of backwards bending labour supply curves, and regard them as just another one of those weird things profs put on exams to trip people up. Yet a number of studies have found that male labour supply curves bend backwards, especially those of married men already in the labour market (see, for example, recent and comprehensive surveys by Keane and by Evers, de Mooij and van Vuuren).
In fact, backwards bending supply curves are only natural. Pigeons pecking for grains have labour supply curves that are upwards sloping at low wage rates, but then bend backwards at higher wages, as pigeons become less inclined to substitute pecking for other pigeon pursuits. The labour supply curves of rats and mice are also backwards bending.
Indeed, one of the thing that is striking about observing animals in the wild, particularly predators like lions, is what slackers they are. Your average lion snoozes his or her day away. Those pictures of a lion staring down a wildebeast or an impala or a tsessebe? All the lion is doing is staring. She's won't try to run down an antelope in broad daylight - that's far too much like hard work.
After all, consuming stuff is good, but there are other things worth doing in life, like mucking around in the waterhole, having a mud bath, caring for family, fighting over women, or making love.
Other than having an excuse to post pictures of elephants, what's the point?Understanding why people (or animals) work helps illuminate the impact of changing technology. Animals demonstrate backwards bending labour supply curves in laboratory experiments because they’re paid in food, and an animal only needs so much food. Humans are paid in money. They will devote their efforts to paid work if it is a relatively good way of getting the things people really care about – sex, status, and security. In the recent past, it has been, but it may not be in the future. As I have argued before the world of virtual reality offers an alternative way of achieving a good life, one that does not rely on paid work. If paid work becomes relatively less appealing, and time for other things more, people’s labour supply choices will change.
Another motivation for this post is that backwards bending labour supply curves matter for public policy debates. Take, for example, the question of tax policy. The lay person’s understanding of tax cuts goes something like this “tax cuts are good because higher wage rates mean people work harder.” When labour supply curves are backwards bending, however, tax cuts may mean people work less hard. As Keene argues, there may still be good efficiency arguments for reducing tax rates, even if labour supply curves do bend backwards, but the simple higher wages = more work effort argument does not stand up to serious scrutiny.
Or take, as another example, the question of pay for executives and other high earners. If labour supply curves bend backwards, paying an executive more will not generate any increase in work effort. In my view, high salaries are not about creating incentives for work effort. Firms pay their CEOs high salaries for the same reason that NHL teams write multi-million dollar contracts for star forwards and winning goalies - they want to attract and keep star players. The NHL realized that such bidding wars harm team owners, and so brought in a salary cap to stop them.
Perhaps shareholders need a Gary Bettman?