Question

Would you consider Labor (number of hours worked) as a normal or an inferior good? Explain your answer in details in line with the theory covered in class.

As a policy maker managing human resources, what would be the advantages and disadvantages of having Labor as an inferior good?

Answer 1

Labour and leisure hours make up the total time of an individual’s daily life. Labour gives income which can be used to obtain goods and services to derive utility. Leisure gives utility directly to the individual.

Increase in labour increases income but reduces leisure. Similarly increase in leisure will reduce the labour time and reduce income. Thus, every individual makes a trade-off between labour and leisure to reach an optimal point.

Leisure is generally considered as a normal good whose demand increases as the income rise. However, at low rates of wage, an individual is willing to work for larger number of hours and sacrifice leisure to obtain a given level of income and standard of living. Thus, labour behaves as a normal good.

As wage rates rise and the individual can earn higher income, the individual becomes ready to substitute leisure for labour, i.e. the individual demands more leisure and reduces the number of hours worked (labour). In such a case labour becomes an inferior commodity for the individual.

This particular phenomenon also gives rise to the backward bending nature of the individual’s labour supply curve.

Advantages of labour as an inferior commodity

1. When labour behaves as an inferior commodity, it becomes imperative that people value leisure which is a necessity for mental and psychological well-being.

2. Inferiority of labour at higher wages provides the prospect for generating more employment as the work has to be divided and assigned to a greater number of individuals, as individuals with high income are reluctant to offer greater labour services.

Disadvantages of labour as an inferior commodity

1. Generally high-profile jobs offer higher remuneration and since as at higher levels of income labour becomes an inferior commodity, it becomes challenging to find individuals or make existing individuals work for more hours which the jobs demand.

2. If labour is inferior, high wages and salaries offered by companies no longer act as an incentive for more work hours. In such a situation companies generally provides other emoluments such as free holiday packages to motivate workers.