The Role of Productivity in Work Decisions

Productivity is a central factor determining who should work and how much, as it directly influences overall welfare in society. Wages serve as a proxy for productivity, where higher wages typically indicate greater productivity levels. However, this relationship is nuanced by the high value individuals place on leisure, which can lead to variations in work hours despite wage differences. The interplay between the income effect, where increased wages may lead to more leisure time, and the substitution effect, where higher wages could incentivize more work, complicates the overall picture of labor participation.