In the real world, few of us can choose how many hours we would like to work. Usually an offer is made which might allow you negotiate for the wage, but not necessarily for the hours. We will, however, assume in the following analysis that you can determine the number of hours you wish to work. In the following section, we will take a closer look at what the factors are that influence a rational individual's choice on how many hours to work.
Take the case of Kevin. Kevin needs to decide how many hours to allocate to work and how many hours to allocate to leisure. Since he is a rational individual, he will compare the marginal utility of an additional hour of leisure with the marginal utility he gets from working an additional hour.
Assume Kevin can earn a R100 per hour. What is his marginal utility he gets from working an additional hour? And what is the opportunity cost of working this additional hour? The marginal utility he gets from working an additional hour is the satisfaction he derives from goods and services he can purchase with a R100. What he gives up to earn this R100 is the loss of an additional hour of leisure. This is his opportunity cost to work an additional hour.
If Kevin estimates that a R100 worth of goods and services adds more to his total utility than an additional hour of leisure, what advice would you give him?
- He should work an additional hour.
- He should rather take the additional leisure time.
From this behaviour, we can derive the rule that for an individual, the optimal labour supply choice is to allocate his or her hours between work and leisure in such a way that the marginal utility of an hour of leisure is equal to the marginal utility derived from the goods he or she can purchase with the hourly wage. What we observe here is the same behaviour we saw when consumers must decide how to spend their limited income. In this case, it is time that is limited.
How will Kevin change his behaviour if the wage rate increases from R100 per hour to R200 per hour?
- He will work longer hours since his incentive to work has increased. He can now afford to buy more goods and services.
- Since he gets more income for working the same amount of hours, he will not increase his hours of work. In this case, he prefers leisure to working and earning an income.