Lecture Labour market economics: Chapter 3 - Dwayne Benjamin, Morley Gunderson, Craig Riddell

Chapter 3 - Labour supply and public policy. The main contents of this chapter include all of the following: Labour supply factors, government transfer programs, welfare programs, workers compensation, child-care subsidies,...and other contents.

Chapter Three Labour Supply and Public Policy: Work Incentive Effects of Alternative Income Maintenance Schemes  Created by: Erica Morrill, M.Ed           Fanshawe College © 2002 McGraw­Hill Ryerson Ltd Chapter 3­1 Chapter Focus  Labour Supply Factors  Government transfer programs  Welfare programs  Workers compensation  Child-care subsidies © 2002 McGraw­Hill Ryerson Ltd Chapter 3­2 Income Maintenance Schemes  Designed to supplement low incomes  No single program can address the multiple reasons for low income  Difficult for policy makers to design the ideal program © 2002 McGraw­Hill Ryerson Ltd Chapter 3­3 Universal Programs  Administratively simple  Everyone receives the same transfer regardless of income  Results in raising income and eliminating poverty  Expensive  Benefits non-poor © 2002 McGraw­Hill Ryerson Ltd Chapter 3­4 Perfect Targeting Cheaper method  Individuals are given exactly enough of a transfer to reach the poverty line  Only those below poverty line would receive transfer  Individuals below poverty line are guaranteed to be topped up  May cause individuals to reduce work effort  Creates a disincentive to earn income  © 2002 McGraw­Hill Ryerson Ltd Chapter 3­5 Permanent or Transitory  Design features  to compensate for low wages or lack of hours  Distinction between permanent and transitory are difficult to isolate © 2002 McGraw­Hill Ryerson Ltd Chapter 3­6 Characteristics of a Demogrant  Lump sum transfer  Income grant  Specific to a demographic group  Old Age Security (OAS)  Universal © 2002 McGraw­Hill Ryerson Ltd Chapter 3­7 Work Incentive Effects of a Lump Sum Demogrant Figure 3.1 ­ if working time is not  altered the equilibrium is E1 Income Y1 Yd E1  Ed E0  U1 U0 ­income constraint shifts up by amount of the  grant ­ slope is the same and  there is no substitution  effect Ud demogrant T Leisure © 2002 McGraw­Hill Ryerson Ltd Chapter 3­8 Work Incentive Effects of a Lump Sum Demogrant  No substitution effect  Work incentives are reduced  Pure leisure - inducing income effect  Increase in income is less than the demogrant (used to buy leisure) © 2002 McGraw­Hill Ryerson Ltd Chapter 3­9 Welfare  Administered by the provinces  Financed partly by the federal government  Benefits depend on  needs of the family,  assets  other sources of income © 2002 McGraw­Hill Ryerson Ltd Chapter 3­10 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 © 2002 McGraw­Hill Ryerson Ltd Chapter 3­19 Figure 3.4 Income Effects of a Negative Income Tax slope = w B Eo ­income guarantee shifts the income  constraint up the amount of the  guarantee ­ income support declines as income from work increases Slope=(1­t)w EN U0 UN G T Leisure © 2002 McGraw­Hill Ryerson Ltd Chapter 3­20 Figure 3.5 Wage Subsidy ­as with a wage   a subsidy  rotates the income constraint upward Us U0 Es ­substitution effect and  income effect work in  opposite directions E0 T © 2002 McGraw­Hill Ryerson Ltd Chapter 3­21 Wage Subsidy  Theoretically 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 © 2002 McGraw­Hill Ryerson Ltd Chapter 3­22 Figure 3.6 Income Wage Subsidy vs Negative Income Tax Es negat ive in come  ta EN x wa ge U  su bs idy T Leisure © 2002 McGraw­Hill Ryerson Ltd Chapter 3­23 Unemployment InsuranceAssisted Work-Sharing Figure 3.8 E0 Y0 Ys ­ income falls by 40 percent for every day of work reduction ­new equilibrium is on higher  indifference curve because the  Es individual gets a day of leisure for only a 40% drop in income UUs 0 4 Days © 2002 McGraw­Hill Ryerson Ltd Chapter 3­24 5 Days Effect of a Disability  Budget constraint or preference curve could be altered  Factors to be considered:  hours able to work  medical expenses  reduced ability to earn wages  disutility of labour market vs other activities © 2002 McGraw­Hill Ryerson Ltd Chapter 3­25 Figure 3.10 a Effect of Compensation Income ­ two thirds of the loss of income  ­ compensation is available for any combination of partial disabilities Y0 U0 H0 Yd=2/3Y0 Hf Leisure © 2002 McGraw­Hill Ryerson Ltd Chapter 3­26 Figure 3.10 b Compensation: No Incentive to Return to Work Income Utility under compensation is greater than utility under work Not providing compensation would reduce individual’s  utility to Uf EC Uc U0 Y0 Uf H0 Hf Leisure © 2002 McGraw­Hill Ryerson Ltd Chapter 3­27 Compensation: Restoring Income Figure 3.10 c ­ permanent injury forces  individual to locate at Hf ­ medical costs reduce utility to Ud Income If court  wanted to  Y0 restore  individual to  former  utility ­ court award for income &  medical Y Ud C U0 Hf H0 UY M Leisure © 2002 McGraw­Hill Ryerson Ltd Chapter 3­28 Figure 3.11 Child Care: Impact on Budget Constraint Income A ­ fixed day­care cost results in a vertical drop in the budget  constraint B Y Y­m E M Cost of  Daycare Leisure T © 2002 McGraw­Hill Ryerson Ltd Chapter 3­29 Figure 3.11 b Income M’ R’ Day-Care: Impact on Participation ­ if market wage below reservation wage,  individual is better off engaging in  nonlabour activities ­ slope of MM’ is greater than RR’  indicating a reservation wage greater due  to fixed day­care costs E0 E U0 R M Hm T Leisure © 2002 McGraw­Hill Ryerson Ltd Chapter 3­30 Figure 3.11c Day-Care:Impact on Hours Worked Income M’ ­ Eo no child care costs ­ day­care costs shift the budget  constraint down parallel since market  wages haven’t changed ­ indicate the number of hours below  which it would not be worth while  to enter the labour market Eo U0 Em U1 M H1 Hm H0 Leisure T © 2002 McGraw­Hill Ryerson Ltd Chapter 3­31 Day-care Subsidy  Encourages labour force participation and part-time work  Reduces the hours of work for those already participating © 2002 McGraw­Hill Ryerson Ltd Chapter 3­32 End of Chapter Three © 2002 McGraw­Hill Ryerson Ltd Chapter 3­33 ... © 2002 McGraw­Hill Ryerson Ltd Chapter 3 22 Figure 3. 6 Income Wage Subsidy vs Negative Income Tax Es negat ive in come  ta EN x wa ge U  su bs idy T Leisure © 2002 McGraw­Hill Ryerson Ltd Chapter 3 23 Unemployment... © 2002 McGraw­Hill Ryerson Ltd Chapter 3 29 Figure 3. 11 b Income M’ R’ Day-Care: Impact on Participation ­ if market wage below reservation wage,  individual is better off engaging in  nonlabour activities... © 2002 McGraw­Hill Ryerson Ltd Chapter 3 30 Figure 3. 11c Day-Care:Impact on Hours Worked Income M’ ­ Eo no child care costs ­ day­care costs shift the budget  constraint down parallel since market wages haven’t changed