What a Raise Does to Hours of Work

Petunia has eighty hours a week to divide between work and leisure. At $12 an hour her best choice is A: thirty hours of leisure, fifty of work, $600 of income. A raise to $20 an hour swings the budget line out from the same corner at eighty hours, and she moves to B: forty hours of leisure, forty of work, $800.

She works fewer hours after a raise, which sounds wrong until the move is split. The dashed line carries the new wage but leaves her as well off as before; sliding along her original curve to C would have her take less leisure, because an hour off now costs more. That is the substitution effect. The income effect, from C to B, works the other way: being better off, she buys more leisure. Here it wins. The slider sets the new wage.