The Illusory Backward Bending Supply Curve of Labor – or – Why Do You Still Work If You Make So Much Money?!

26 02 2010

I know, I know. How on Earth was it such a close call between those two post titles? That aside…

The reality is that I’m an economics wonk and I’m pretty convinced that people respond to incentives in fairly predictable ways. I also find it interesting when theory and reality don’t make sense at first glance. Here is one instance where that happens.

The theory:

The backward bending supply curve of labor relates to the trade-off between work and leisure, and in a nutshell states that when people are paid higher wages they work longer hours, but only to a point. At that point, the more you pay people the less they work, because (a) workers generally prefer leisure over work, and (b) beyond that point they can sustain their consumption habits while working fewer hours. Early retirement is frequently considered an example of the backward bending supply curve of labor and its relation to the trade-off between work and leisure.

The reality:

I worked in financial services on Wall Street. Yes, that Wall Street. You know, the one that populist anger is targeted at. The one that just paid out huge bonuses as unemployment topped 10%. It’s not the bonuses that I find interesting now, it’s their effect on labor supply. I get why someone making $70k in New York City would work harder and push for $100k (the lifestyle difference). I sort of get why someone making $20 million would push for $50 million (the public image).

What I don’t get:

What I don’t get is that there are a lot of people on Wall Street in the middle. There are lots of middle-manager-equivalents who would push themselves like crazy to go from $200k to $250k. These are people who know they aren’t on a career path to the top. That I just don’t get, at least for the ones without debt and who don’t lead extravagant lifestyles. I see people who are lifers, who will stay in the industry forever. These aren’t people who are thrilled to go to work every day and these aren’t people making headlines. What gives?

Here’s what I think:

  • For one, many people are in debt and have let their consumption rise with their salaries

With regard to the rest:

  • Many feel like their salaries define their value as people
  • Many have been working for so long they have their let their hobbies atrophy. They don’t know what else they would do.
  • Many are overly concerned with societal pressures and keeping up their image (amusing research). They prefer their title over their happiness.

The solution

Don’t let other people dictate your life decisions. Be comfortable in your own skin, and always know why you are working. Do you love your job? Are you saving for an escape? Do you have inescapable financial obligations? If not, it’s time to reassess why you are doing what you’re doing and make sure you are working with purpose.

posted by jayhorowitz




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