Hours per Person
The wage rate influences not only the number of people who want to
work but also the number of hours that each person wants to work. When
workers sell their labour services to employers, they are giving up leisure
in order to gain income with which to buy goods. They can therefore be
thought of as trading leisure for goods. A rise in the wage implies a
change in the relative price of goods and leisure. An increase in the wage
means that leisure becomes more expensive relative to goods, because
each hour of leisure consumed comes at the cost of more goods forgone.
It is not necessarily the case, however, that an increase in the wage
increases the amount of hours worked. In fact, an increase in the wage
generates both income and substitution effects (see Chapter 6 ). As the
wage rises, the substitution effect leads the individual to work more hours
(consume less leisure) because leisure is now relatively more expensive.
The income effect of a higher wage, however, leads the individual to work
fewer hours (consume more leisure). Because the two effects work in the
opposite direction we are, in general, unsure how a rise in the wage will
affect the number of hours an individual chooses to work.
Over the past century, the Canadian data show a clear increase in the
average real wage and a clear reduction in the average number of hours
worked per week. These observations are consistent with the idea that, at
some relatively high level of wages, the income effect of wage increases
dominates the substitution effect. In other words, workers at some point