Wage Increase

Difference Between Substitution Effect and Income Effect

Substitution Effect

The substitution effect states that workers are encouraged to work more when the wages increase. This is because they get more money by working for longer hours and this motivates them to put in more time and effort. This means there is a positive relationship between wage increase and the effort put in by workers. When one increases, the other increases too. Also, the amount of leisure time available for workers goes down because they spend more hours in a day at work. This results in an upward sloping labor supply curve that moves towards the northeast because workers are willing to put in more hours to take advantage of the wage increase.

Income Effect

The income effect of a wage increase means the worker gets more money for the same effort. This means, the worker can enjoy a...
[ View Full Essay]