Okay, continuing in Unit 10, Lesson Two, let's discuss the changes in the real  wage. What happens if there is an increase in the real wage? Let's see. There's  two effects, right? There's a substitution effect, which is an increase in the real  wage, which means that the leisure has become relatively more expensive,  right? So you have to give up more consumption goods to get an hour of leisure  time. So if leisure becomes more expensive, right, you're substituting that out  with more consumption of goods, that is to substitute from leisure to  consumption. This effect predicts that the quantity of labor supplied will increase  because more people are moving to consumption. There is an income effect as  well, an increase in the real wage makes the individual richer. Remember that  we can think of income as equaling 24 times the real wage. In response to  higher income, we expect to see the household increase its consumption of  goods and services, and also increases consumption of leisure. The effect  predicts that the quantity of labor supplied will decrease in the income effect.  Putting these predictions together, we must conclude then that we do not know  what will happen to the quantity of labor supplied when the real wage increases. On the other hand, higher real wages make it attractive to work more, since you  can get more goods and services for each hour of time that you give up. Hence,  the substitution effect. On the other hand, you can get the same amount of  consumption goods with less effort, which makes it attractive to work less, which is the income effect, right? So there's a multiplier on the income effect, right? So  I can make more money through the income effect, right? Which means I'll be  able to work less and consume just as much, if not more. If the substitution  effect is stronger, the labor supply curve has the standard shape; it slopes  upward. The response of the quantity of labor supplied to the real wage depends on both an income effect and a substitution effect. When the substitution effect  is larger than the income effect, the supply curve has the normal upward sloping shape as well. So, in the end, the shape of the labor supply curve is an empirical question. We can answer it only by going through the data. As you might be able to guess, it turns out to be a difficult question to answer once we start dealing  with the complexities of different kinds of labor. The view of most economists  who have studied labor supply is that the labor is that the real wages are higher.  If the wages are higher, that leads to a greater quantity of labor supply, but the  effect is not very strong. On the other hand, the income effect almost cancels  out the substitution effect. This means that the labor supply curve slurps slopes  upward, but it is quite steep because we are working less hours, but for the  same amount of money, if not more. 



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