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 Focus

 Labour Supply Factors

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

Perfect Targeting

transfer to reach the poverty line

transfer

to be topped up

 Distinction between permanent and

transitory are difficult to isolate

Characteristics of a Demogrant

 Lump sum transfer

 Income grant

 Specific to a demographic group

 Universal

demogrant

Figure 3.1 Work Incentive Effects of a

Lump Sum Demogrant

­ slope is the same and there is no substitution effect

­ if working time is not altered the equilibrium

is E1Income

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)

Welfare

 Administered by the provinces

 Financed partly by the federal

­ potential income constraint is horizontal at the amount of the welfare payment

­strong incentive to move to corner 

solution 

Welfarebenefit

Y0

Uw

Ew

Yw

Welfare:100% “Claw Back”

 Adverse effect on work incentives

 Work is not chosen because of the

100% tax on earned income

 Negative impact on work incentives

 Not an acceptable policy

Welfarebenefit

Welfare: Reduce Benefit

 Successful in reducing the number of people on welfare

 May deny welfare to those in need

 Inadequate income support to

unemployable

­  wage rate to encourage individuals to voluntarily leave welfare

 government wage subsidy

 institutional pressure (unionization, minimum

wage)

­  tax by requiring recipients togive up only a portion of welfare

Ew

E0

­alter preferences away from welfareflattens the indifference curve

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

E o

GSlope=(1­t)w

­income guarantee shifts the income constraint up the amount of the 

­substitution effect and income effect work in opposite directions

Wage Subsidy

 Theoretically indeterminate

 Adverse effects of wage subsidy are not

as great as those of the negative

income tax

 Disadvantage

are unable to work

E s

E N

negative income tax

LeisureIncome

Es

activities

Not providing compensationwould reduce individual’s utility to Uf

Ud

­ court award for income & medical

a vertical drop in the budget constraint

E0

Hm

­ 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 day­care costs

Figure 3.11c Day-Care:Impact on Hours

­ indicate the number of hours below which it would not be worth while 

to enter the labour market

End of Chapter Three