If the substitution effect of a wage increase dominates the income effect, the labor supply curve has a positive slope.

Question

Quizplus · Accepted Answer

The substitution effect of a wage increase refers to the increased incentive to work more as the wage becomes more attractive relative to other leisure activities. The income effect, on the other hand, refers to the decreased incentive to work more as the worker's income increases and the marginal benefit of leisure time becomes relatively more attractive. If the substitution effect dominates the income effect, the overall effect of a wage increase is to encourage more work, leading to a positive slope of the labor supply curve.

If the Substitution Effect of a Wage Increase Dominates the Income