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Labor Supply and the Dutch Economy

RICHARD PARKIN

In the Netherlands, four-day workweeks are common. Dutch employees work an average of 32.1 hours per week, well below the EU average of 36 hours. The country also has one of the highest incomes per person in Europe. Higher wages are leading Dutch workers to trade additional income for leisure.—bbc.com

Answer the following questions to check your understanding of the story.

What is the shape of the labor supply curve in the Netherlands?

Wrong! - An upward-sloping and a downward-sloping labor supply curve imply that workers always increase and decrease labor hours, respectively, when the wage rate rises. In the Netherlands, at high wages, workers decrease labor hours when wages rise, so the curve is not forward bending.

Correct! - As wages rise, labor hours first increase, but at high income levels, as in the Netherlands, further wage increases lead workers to choose more leisure and fewer labor hours, making the labor supply curve backward bending.

What is the substitution effect of a rise in the wage rate?

 

 

Wrong! - The substitution effect increases labor hours and decreases leisure hours as the wage rate rises. It results in a movement along the upward sloping portion of the labor supply curve. It does not shift the curve.

That's Right! - The substitution effect is the increase in labor hours that occurs when a rise in the wage rate increases the opportunity cost of leisure and makes leisure more expensive.

What is the income effect of a rise in the wage rate?

Wrong! - The income effect increases, not decreases, leisure hours as the wage rate rises. It results in a movement along the backward-bending portion of the labor supply curve. It does not shift the curve.

Good Job! -The income effect is the decrease in labor hours that occurs when a rise in the wage rate increases income. At high income levels, workers choose more leisure and decrease labor hours.

What type of good is leisure?

Wrong! - If leisure were an inferior good, the Dutch would choose less leisure as income rises. Leisure is not a club good. It is rival because one person’s leisure time cannot be consumed by another. Leisure is not a public good. It is rival and excludable.

Well Done! -As income rises, the Dutch choose more leisure. Therefore, leisure is a normal good.

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