Bài giảng Labour Market Economics - Chapter 3 Labour Supply and Public Policy: Work Incentive Effects of Alternative Income Maintenance Schemes

Chapter ThreeLabour Supply and Public Policy: Work Incentive Effects of Alternative Income Maintenance Schemes Created by: Erica Morrill, M.Ed Fanshawe College1© 2002 McGraw-Hill Ryerson Ltd.Chapter FocusLabour Supply FactorsGovernment transfer programs Welfare programsWorkers compensation Child-care subsidies2© 2002 McGraw-Hill Ryerson Ltd.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 program3© 2002 McGraw-Hill Ryerson Ltd.Universal ProgramsAdministratively simpleEveryone receives the same transfer regardless of income Results in raising income and eliminating povertyExpensiveBenefits non-poor 4© 2002 McGraw-Hill Ryerson Ltd.Perfect TargetingCheaper methodIndividuals are given exactly enough of a transfer to reach the poverty lineOnly those below poverty line would receive transferIndividuals below poverty line are guaranteed to be topped upMay cause individuals to reduce work effortCreates a disincentive to earn income5© 2002 McGraw-Hill Ryerson Ltd.Permanent or Transitory Design featuresto compensate for low wages or lack of hoursDistinction between permanent and transitory are difficult to isolate 6© 2002 McGraw-Hill Ryerson Ltd. Characteristics of a DemograntLump sum transferIncome grantSpecific to a demographic groupOld Age Security (OAS)Universal7© 2002 McGraw-Hill Ryerson Ltd.demograntFigure 3.1 Work Incentive Effects of a Lump Sum Demogrant0U0TE0 -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 E1IncomeLeisureU1E1 Y1UdEdYd8© 2002 McGraw-Hill Ryerson Ltd.Work Incentive Effects of a Lump Sum DemograntNo substitution effect Work incentives are reducedPure leisure - inducing income effectIncrease in income is less than the demogrant (used to buy leisure)9© 2002 McGraw-Hill Ryerson Ltd.WelfareAdministered by the provincesFinanced partly by the federal governmentBenefits depend onneeds of the family,assets other sources of income10© 2002 McGraw-Hill Ryerson Ltd.Figure 3.2 Welfare: 100% “Claw-Back”0U0TE0- 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 WelfarebenefitY0UwEwYw11© 2002 McGraw-Hill Ryerson Ltd.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 policy12© 2002 McGraw-Hill Ryerson Ltd.U0E0Figure 3.3 a Welfare Reduce Benefit0T- lower welfare payments- no incentive to go on welfaresince the individual is alreadymaximizing at E0Uw’Welfarebenefit13© 2002 McGraw-Hill Ryerson Ltd.Welfare: Reduce BenefitSuccessful in reducing the number of people on welfareMay deny welfare to those in needInadequate income support to unemployable14© 2002 McGraw-Hill Ryerson Ltd.- wage rate to encourage individuals to voluntarily leave welfareFigure 3.2 b Welfare:Increase Wage Rate0U0UwTE1EwWelfare benefit15© 2002 McGraw-Hill Ryerson Ltd.WelfareIncrease Wage Rate through:trainingjob informationmobilitygovernment wage subsidyinstitutional pressure (unionization, minimum wage)CostlyIncrease work incentives16© 2002 McGraw-Hill Ryerson Ltd.- tax by requiring recipients togive up only a portion of welfareif they earn income by workingFigure 3.2 c Welfare:Reduce the Implicit Tax0UwTUw ’Ew ’WelfarebenefitEw17© 2002 McGraw-Hill Ryerson Ltd.Figure 3.2 d Welfare: Change  Preferences0TWelfarebenefitU0E0-alter preferences away from welfareflattens the indifference curve18© 2002 McGraw-Hill Ryerson Ltd.Negative Income Taxincome guaranteeImplicit tax rate of less than 100%Recipients receive more from the guarantee than they will pay out in taxes Child Tax Credit Guaranteed Income Supplement19© 2002 McGraw-Hill Ryerson Ltd.EoGSlope=(1-t)w-income guarantee shifts the income constraint up the amount of the guarantee0U0TFigure 3.4 Effects of a Negative Income TaxB- income support declines as incomefrom work increasesslope = wLeisureIncomeUNEN20© 2002 McGraw-Hill Ryerson Ltd.0Figure 3.5 Wage SubsidyTU0E0UsEs-as with a wage  a subsidy rotates the income constraintupward-substitution effect and income effect work in opposite directions21© 2002 McGraw-Hill Ryerson Ltd.Wage SubsidyTheoretically indeterminate Adverse effects of wage subsidy are not as great as those of the negative income taxDisadvantage does nothing for the income of those who are unable to work22© 2002 McGraw-Hill Ryerson Ltd.0Figure 3.6 Wage Subsidy vs. Negative  Income TaxTUwage subsidyEsENnegative income taxLeisureIncome23© 2002 McGraw-Hill Ryerson Ltd.Figure 3.8 Unemployment Insurance-Assisted Work-Sharing07Y0U0E0234 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 incomeEsYsUs24© 2002 McGraw-Hill Ryerson Ltd.Effect of a Disability Budget constraint or preference curve could be alteredFactors to be considered:hours able to workmedical expensesreduced ability to earn wagesdisutility of labour market vs. other activities25© 2002 McGraw-Hill Ryerson Ltd.0U0IncomeLeisureH0Y0Figure 3.10 a Effect of CompensationHfYd=2/3Y0- two thirds of the loss of income - compensation is available for anycombination of partial disabilities26© 2002 McGraw-Hill Ryerson Ltd.0U0IncomeLeisureH0Y0ECUcFigure 3.10 b Compensation: No  Incentive to Return to WorkHfUtility under compensation isgreater than utility under workUfNot providing compensationwould reduce individual’s utility to Uf27© 2002 McGraw-Hill Ryerson Ltd.0U0IncomeLeisureH0Y0CUYFigure 3.10 c Compensation: Restoring IncomeYMUd- permanent injury forces individual to locate at Hf- medical costs reduce utility toUd- court award for income & medicalIf court wanted to restore individual to former utilityHf28© 2002 McGraw-Hill Ryerson Ltd.0TFigure 3.11 Child Care: Impact on Budget ConstraintIncomeLeisureABEMCost of DaycareYY-m- fixed day-care cost results ina vertical drop in the budget constraint29© 2002 McGraw-Hill Ryerson Ltd.Figure 3.11 b Day-Care: Impact on Participation0U0EMRIncomeLeisureTE0Hm- if market wage below reservation wage, individual is better off engaging in nonlabour activitiesM’R’- slope of MM’ is greater than RR’ indicating a reservation wage greater due to fixed day-care costs30© 2002 McGraw-Hill Ryerson Ltd.Em0TIncomeLeisureMFigure 3.11c Day-Care:Impact on Hours WorkedEoM’U0U1H1H0Hm- Eo no child care costs- day-care 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 market31© 2002 McGraw-Hill Ryerson Ltd.Day-care SubsidyEncourages labour force participation and part-time workReduces the hours of work for those already participating32© 2002 McGraw-Hill Ryerson Ltd.End of Chapter Three33© 2002 McGraw-Hill Ryerson Ltd.