Labor economist Alan Manning provides some unconventional evidence of positively sloped labor-supply curves. He notes that people go to the pub to celebrate when they get a job, rather than greeting the news with a shrug of the shoulders . . . . In other words, a new job is a big deal.
If a pub celebration seems like the obvious response to a new job, consider what happens when each firm faces a horizontal supply curve for labor, with a single market wage. A firm has no incentive to pay a higher wage because it can hire as many workers as it wants at the market wage. And if the firm paid a lower wage, all its workers would instantly switch to other firms paying the market wage. In this perfectly competitive environment, a worker won’t celebrate a new job because the new job pays the same as any other job the worker could get. The wage paid by an employer equals the worker s opportunity cost.
Suppose instead that the supply curve facing a firm is positively sloped. To hire more workers, the firm must pay a higher wage. Most workers will receive a wage that exceeds the opportunity cost of their time, so each worker gets a producer surplus. Workers switch jobs to get a bigger surplus, so they celebrate new jobs. Manning notes that people also go to the pub to drown their sorrows when they lose their jobs. This response wouldn’t be sensible with a horizontal supply curve, because someone who loses a job could instantly get another one at the same wage. But with a positively sloped supply curve, losing a job means losing a producer surplus.