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By the end of this section, you will be able to:

  • Interpret labor-leisure budget constraint graphs
  • Predict consumer choices based on wages and other compensation
  • Explain the backward-bending supply curve of labor

People do not obtain utility just from products they purchase. They also obtain utility from leisure time. Leisure time is time not spent at work. The decision-making process of a utility-maximizing household applies to what quantity of hours to work in much the same way that it applies to purchases of goods and services. Choices made along the labor-leisure budget constraint , as wages shift, provide the logical underpinning for the labor supply curve. The discussion also offers some insights about the range of possible reactions when people receive higher wages, and specifically about the claim that if people are paid higher wages, they will work a greater quantity of hours—assuming that they have a say in the matter.

According to the Bureau of Labor Statistics, U.S. workers averaged 38.6 hours per week on the job in 2014. This average includes part-time workers; for full-time workers only, the average was 42.5 hours per week. [link] shows that more than half of all workers are on the job 35 to 48 hours per week, but significant proportions work more or less than this amount.

[link] breaks down the average hourly compensation received by private industry workers, including wages and benefits. Wages and salaries are about three-quarters of total compensation received by workers; the rest is in the form of health insurance, vacation pay, and other benefits. The compensation workers receive differs for many reasons, including experience, education, skill, talent, membership in a labor union, and the presence of discrimination against certain groups in the labor market. Issues surrounding the inequality of incomes in a market-oriented economy are explored in the chapters on Poverty and Economic Inequality and Issues in Labor Markets: Unions, Discrimination, Immigration .

(Source: http://www.bls.gov/news.release/empsit.t18.htm)
Persons at work, by average hours worked per week in 2013 (total number of workers: 137.7 million)
Hours Worked per Week Number of Workers Percentage of Workforce
1–14 hours 6.9 million 5.0%
15–34 hours 27.6 million 20.1%
35–40 hours 68.5 million 49.9%
41–48 hours 11.9 million 8.6%
49–59 hours 13.3 million 9.6%
60 hours and over 9.3 million 6.8%
(Source: http://www.bls.gov/news.release/pdf/ecec.pdf)
Hourly compensation: wages, benefits, and taxes in 2014
Compensation, Wage, Salary, and Benefits $30.92 per hour
Wages and Salaries $20.92
Benefits
Vacation $2.09
Supplemental Pay $0.84
Insurance $2.15
Health Benefits $2.36
Retirement and Savings $1.24
Defined Benefit $0.57
Defined Contribution $0.064
Legally Required $2.46

The labor-leisure budget constraint

How do workers make decisions about the number of hours to work? Again, let’s proceed with a concrete example. The economic logic is precisely the same as in the case of a consumption choice budget constraint , but the labels are different on a labor-leisure budget constraint.

Questions & Answers

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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