chapter 3-1 chapter three labour supply and public policy: work incentive effects of alternative...
TRANSCRIPT
Chapter 3-1
Chapter Three
Labour Supply and Public Policy:
Work Incentive Effects of Alternative Income Maintenance Schemes
Chapter 3-2
Learning ObjectivesIncome Maintenance Schemes DemograntWelfare ProgramsNegative Income TaxWage SubsidyEarned Income Tax CreditUnemployment InsuranceWorkers Compensation Childcare Subsidies
Chapter 3-3
Income Maintenance SchemesDesigned to supplement low incomesNo single program can address the
multiple reasons for low income Difficult for policy makers to design the
ideal program
Chapter 3-4
Income Maintenance Schemes
Chapter 3-5
Characteristics of a DemograntLump sum transfer Income grantSpecific to a demographic group
Old Age Security (OAS)Universal
Chapter 3-6
demogrant
Work Incentive Effects of a Lump Sum Demogrant
0
U0
T
E0
-income constraint shiftsup by amount of the grant
- slope is the same and there is no substitution effect
- if working time is not altered the equilibriumis E1
Income
Leisure
U1
E1 Y1
Ud
EdYd
Chapter 3-7
Work Incentive Effects of a Lump Sum Demogrant
No substitution effect Work incentives are reducedPure leisure - inducing income effect Increase in income is less than the
demogrant (used to buy leisure)
Chapter 3-8
WelfareAdministered by the provincesFinanced partly by the federal
governmentBenefits depend on
needs of the family, assets other sources of income
Chapter 3-9
Welfare: 100% “Claw-Back”
0
U0
T
E0
- at max leisure the income constraintshifts vertically up by the welfare payment
- potential income constraint is horizontal at the amount of the welfare payment
-strong incentive to move to corner solution
Welfarebenefit
Y0
Uw
Ew
Yw
Chapter 3-10
Welfare:100% “Claw Back”Adverse effect on work incentivesWork is not chosen because of the
100% tax on earned incomeNegative impact on work incentives Not an acceptable policy
Chapter 3-11
U0
E0
Welfare Reduce Benefit
0 T
- lower welfare payments
- no incentive to go on welfaresince the individual is alreadymaximizing at E0
Uw’
Welfarebenefit
Chapter 3-12
Welfare: Reduce BenefitSuccessful in reducing the number of
people on welfareMay deny welfare to those in need Inadequate income support to
unemployable
Chapter 3-13
- wage rate to encourage individuals to voluntarily leave welfare
Figure 3.2 b Welfare:Increase Wage Rate
0
U0
Uw
T
E1
Ew
Welfare benefit
Chapter 3-14
Welfare
Increase Wage Rate through: training job information mobility government wage subsidy institutional pressure (unionization, minimum
wage)
Costly Increase work incentives
Chapter 3-15
- tax by requiring recipients togive up only a portion of welfareif they earn income by working
Welfare:Reduce the Implicit Tax
0
Uw
T
Uw ’
Ew ’
Welfarebenefit
Ew
Chapter 3-16
Negative Income Tax income guarantee Implicit tax rate of less than 100%Recipients receive more from the
guarantee than they will pay out in taxes Child Tax Credit Guaranteed Income Supplement
Chapter 3-17
EoG
Slope=(1-t)w
-income guarantee shifts the income constraint up the amount of the guarantee
0
U0
T
Figure 3.4 Effects of a Negative Income Tax
B
- income support declines as incomefrom work increases
slope = w
Leisure
Income
UN
EN
Chapter 3-18
0
Figure 3.5 Wage Subsidy
T
U0
E0
Us
Es
-as with a wage a subsidy rotates the income constraintupward
-substitution effect and income effect work in opposite directions
Chapter 3-19
Wage SubsidyTheoretically indeterminate Adverse effects of wage subsidy are not
as great as those of the negative income tax
Disadvantage does nothing for the income of those who
are unable to work
Chapter 3-20
0
Figure 3.6 Wage Subsidy vs. Negative Income Tax
T
Uwage subsidy
Es
ENnegative income tax
Leisure
Income
Chapter 3-21
Earned Income Tax Credit (EITC) Two Phases of EITC
• Phase-in: Similar to pure wage subsidy program. Substitution and income effects work in opposite directions.
• Phase-out: Similar to negative income tax. Both substitution and income effects work in the same direction and reduce the incentive to work.
Compared to the welfare program, EITC results in more work incentive
Chapter 3-22
EITC:• Phase-in: It provides a refundable tax
credit equal to 20% of earned income-up to $500 for individuals and $1,000 for families. To target assistance to those with lower incomes.
• Phase-out: The credit is reduced by 15% of net income for individuals earning more than $9,500 and families earning more than $14,500.
Chapter 3-23
Welfare with 100% clawback
Chapter 3-24
Employment Insurance The largest single income security program for
non-elderly individuals in Canada The amount of income replacement rate is 55%
of lost earning, subject to a maximum The duration of benefit ranges from 14 to 45
weeks, depending on the regional rate of unemployment
To qualify individuals must have worked at least approximately 12 to 20 weeks, depending the unemployment rate of the region
Chapter 3-25
Employment Insurance (Worked Example)
Chapter 3-26
Unemployment Insurance-Assisted Work-Sharing
0 7
Y0
U0
E0
2 3 4 Days5 Days
- income falls by 40 percent forevery day of work reduction
-new equilibrium is on higher indifference curve because the individual gets a day of leisurefor only a 40% drop in income Note:Current rate 45%
Es
Ys Us
Chapter 3-27
UI-Assisted Worksharing in Canada an experimental program established in Canada in 1977
under which layoffs were avoided in twenty-four firms by reducing the hours worked of all employees.
Workers take advantage of a temporary modification of unemployment insurance legislation that allowed workers to receive UI benefits for the day or so each week that they no longer worked.
an extra day off per week while experiencing only a 5% reduction in after-tax income.
The experiment ended in 1979, but in January 1982 the government again implemented the program on a temporary basis.
Chapter 3-28
Effect of a Disability Budget constraint or preference curve
could be alteredFactors to be considered:
hours able to work medical expenses reduced ability to earn wages disutility of labour market vs. other
activities
Chapter 3-29
Effects of Disability
Chapter 3-30
Effects of Disability
Chapter 3-31
0
U0
Income
LeisureH0
Y0
Effect of Compensation
Hf
Yd=2/3Y0
- two thirds of the loss of income
- compensation is available for anycombination of partial disabilities
Chapter 3-32
0
U0
Income
LeisureH0
Y0EC
Uc
Compensation: No Incentive to Return to Work
Hf
Utility under compensation isgreater than utility under work
Uf
Not providing compensationwould reduce individual’s utility to Uf
Chapter 3-33
0
U0
Income
LeisureH0
Y0
CUY
Compensation: Restoring Income
Y
M
Ud
• Permanent injury forces individual to locate at Hf
• Medical costs reduce utility to Ud
• Court award for income and medical costs to restore individual income (or utility) to its former level
Hf
Chapter 3-34
0 T
Child Care: Impact on Budget Constraint
Income
Leisure
A
B
E
MCost of Daycare
Y
Y-m
- fixed day-care cost results ina vertical drop in the budget constraint
Chapter 3-35
Daycare: Impact on Participation
0
U0E
MR
Income
LeisureT
E0
Hm
M’
R’
RR’ = Reservation wage if no daycare cost existsMM’ = Reservation wage if daycare cost existsEM = Cost of daycare
Chapter 3-36
Em
0 T
Income
Leisure
M
Day-Care:Impact on Hours Worked
Eo
M’U0
U1
H1 H0Hm
- Eo no child care costs
- day-care costs shift the budget constraint down parallelly since market wages haven’t changed
- indicate the number of hours below which it would not be worth while
to enter the labour market
Chapter 3-37
Day-care SubsidyEncourages labour force participation
and part-time workReduces the hours of work for those
already participating
Chapter 3-38
End of Chapter Three