Income and Substitution Effects in Labor Economics: Difference between revisions
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==Income Effect== | ==Income Effect== | ||
When | When wages increase, the income effect states that a worker feels wealthier and that he needs to work less to have the same income. The effect will result in the laborer placing a greater demand on goods, services, and non-market activities so that he/she will cut down on supply of labor. | ||
==Substitution Effect== | ==Substitution Effect== | ||
Revision as of 02:13, 10 April 2006
Labor Economics
Labour economics seeks to understand the functioning of the market for labour. Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers), the demanders of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and income.
It is an important subject because unemployment is a problem that affects the public most directly and severely. Full employment (or reduced unemployment) is a goal of many modern governments.
Real Wage
The real wage describes the quantity of goods that the worker gets for a number of hours of labor. the real wage is the nominal wage adjusted to the level of inflation. It determines how much labor workers will want to supply in the economy.
Factors that Influence Real Wage
Income Effect
When wages increase, the income effect states that a worker feels wealthier and that he needs to work less to have the same income. The effect will result in the laborer placing a greater demand on goods, services, and non-market activities so that he/she will cut down on supply of labor.
