Lesson preview · Labor Supply
Backward-Bending Supply
~6 min · Free to read
Dr. Walker is a surgeon. Last year she earned 300 dollars an hour and worked 60 hours a week. Her contract renewed at 400 dollars an hour — a 33% raise. The standard story says she should work MORE: leisure just got more expensive. Instead, she cut to 50 hours a week and started leaving the OR by 4pm on Fridays. The extra income at her new rate was less valuable to her than the time it bought back.
Dr. Walker isn’t being irrational. She’s responding to the same two forces every worker faces — the substitution effect and the income effect from the last lesson — except at her income, the second force has grown big enough to overpower the first. The resulting shape of her labor supply curve isn’t a clean upward slope. It bends backward.
Key Term
Why supply can bend backward
Both effects always operate when wages rise, but their relative strength changes with income:
- At low wages — substitution effect dominates. The worker isn’t rich enough for the income effect to overpower the pull of higher pay. Supply slopes UP.
- At very high wages — income effect dominates. The worker is already rich, so the extra income from a raise matters less than the leisure they could buy with it. Supply slopes DOWN (bends back).
- At the critical wage — the two effects exactly cancel. Hours peak here.
The resulting supply curve is a hump — upward, then peak, then backward — instead of a straight upward line.
The bars on the right are the mechanism, the curve on the left is the result. The hump shape isn’t an accident or a quirk of preferences — it’s what happens whenever an income effect that grows with the wage eventually overtakes a substitution effect that doesn’t.
Worked Example
A lawyer works 60 hours/week at 200 dollars/hr. When her rate rises to 300 dollars/hr, the substitution effect would add 5 hours but the income effect subtracts 10 hours. What is her new schedule? Is she on the upward or backward-bending portion?
Check yourself · no marks
What factors shift the individual labor supply curve (as opposed to movements along it)?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 4
The labor supply curve bends backward when:
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