Labour Market Economics 9th Edition ISBN 9781259654848 By Dwayne Benjamin, Morley Gunderson, Thomas Lemieux, Riddell, Schirle
TABLE OF CONTENTS Part 1: Labour Supply Chapter 2: Labour Supply: Individual Attachment to the Labour Market Chapter 3: Labour Supply and Public Policy: Work Incentive Effects of Alternative Income Maintenance Schemes Chapter 4: Labour Supply Over The Life Cycle Part 2: Labour Demand Chapter 5: Demand for Labour in Competitive Labour Markets Chapter 6: Labour Demand, Nonwage Benefits, and Quasi-Fixed Costs Part 3: Labour Demand and Supply Together Chapter 7: Wages and Employment in a Single Labour Market Part 4: The Determination of Relative Wages Chapter 8: Compensating Wage Differentials Chapter 9: Human Capital Theory: Applications to Education and Training Chapter 10: Wage Structures Across Markets
Chapter 11: The Economics of Immigration Chapter 12: Discrimination and Male-Female Earnings Differentials Chapter 13: Optimal Compensation Systems, Deferred Compensation, and Mandatory Retirement Part 5: Unions Chapter 14: Unions and Collective Bargaining Chapter 15: Union Impact on Wage and Nonwage Outcomes Part 6: Unemployment Chapter 16: Unemployment: Meaning, Measurement, and Canada's Experience Chapter 17: Unemployment: Causes and Consequences
Chapter 2: Labour Supply: Individual Attachment to the Labour Market MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Empirical literature on labour supply patterns for married women tends to find all of the following, except: A) Labour market participation rate for married women was highest in the 35-44 age group. B) Women with children have lower rates of labour force participation. C) The higher the education level, the higher the labour force participation rate. D) The strong negative relationship between the husband's income and the labour force participation rate for married women. E) Participation rate for all married women is around 75 percent. 2)
Which of the following statements concerning the elasticity of labour supply is true? A) The total wage elasticity of supply tends to be positive and of low magnitude. B) The income elasticity of supply tends to be positive and of low magnitude C) The compensated elasticity of supply is close to zero D) Overall workers tend to be highly responsive to wage changes E) None of these above statements are true
3) Which of the following statements concerning the elasticity of labour supply is false? A) The overall labour supply for both sexes is likely to be backward bending. B) It is generally higher for women than for men. C) The compensated elasticity (reflecting the substitution effect) tends to be higher in
magnitude than the uncompensated, gross elasticity. D) The overall labour supply for both sexes is likely to be upward sloping E) The elasticity of labour supply with respect to income is negative.
4) Which of the following statements is false? A) In periods of high unemployment, discouraged workers tend to withdraw from the
labour force. B) In periods of low unemployment, discouraged workers tend to re-enter the labour force. C) Discouraged workers are part of the hidden unemployment phenomenon D) Discouraged workers are considered to be marginally attached to the labour force E) Discouraged workers behave in a similar fashion as added workers. 5) Suppose a worker is observed to be working but is forced to work fewer hours than she really
wants to work. Which of the following statements is true? A) The indifference curve that she is on is tangent to the budget line. B) She is on an indifference curve which is lower than the one which is tangent to her budget line. C) She is on an indifference curve which is higher than the one which is tangent to her budget line. D) She is on an indifference curve which is lower than the one which passes through the point on the budget line corresponding to zero hours of work. E) She is not on an indifference curve. 6) The slope of the indifference curve at the lower right-hand corner of the income/leisure
diagram, where zero hours of work are supplied to the labour market, is equal to: A) the prevailing market wage. B) the reservation wage. C) the level of non-market income. D) the slope of the budget constraint. E) the difference between the market wage and the reservation wage 7) The reservation wage is defined as: A) the wage of the reservation clerk in the tourism industry. B) the maximum wage that an employer is willing to pay a worker for a given job. C) the minimum wage that an employee is willing to accept for a given job. D) the equilibrium wage. E) the wage rate at which zero hours of labour is supplied by the workers.
8) All of the following patterns of labour market behaviour can be analyzed with the income-
leisure framework, except: A) moonlighting B) overtime work C) labour force participation D) underemployment E) worksharing 9) Consider the situation of a worker who is ‘at the corner equilibrium' i.e., he or she is
supplying zero hours of work and consuming 16 hours of leisure. In context of the incomeleisure framework, which of the following statements is false? A) The indifference curve is steeper than the budget line. B) The marginal rate of substitution between income and leisure is greater than the wage rate in absolute value terms. C) The indifference curve is flatter than the budget line. D) The rate at which the worker is willing to exchange income for leisure is not equal to the market rate for the exchange of income for leisure. E) Marginally, the worker values an hour of leisure more than she values an hour's worth of income. 10) Which one of the following regarding to an individual's budget constraint is correct? A) The slope of the budget constraint is determined by the market wage rate. B) The level of non-labour income determines the intercept of the budget constraint. C) The slope of the budget constraint is determined by the reservation wage rate D) The slope of the budget constraint is equal to the marginal rate of substitution
between income and leisure E) The slope of the budget constraint is higher for a full-time worker than for a part-time worker. 11) In the neo-classical model of labour supply, which of the following is always true? A) If leisure is a normal good, a wage increase causes an increase in hours worked. B) If leisure is a normal good, a wage increase causes a decrease in hours worked. C) The income effect and the substitution effect work in the same direction. D) The substitution effect causes the worker to work more hours if wages increase. E) None of these options
12) Over the backward bending portion of the labour supply curve, A) The substitution effect of a wage change dominates the income effect. B) Leisure becomes an inferior good. C) The wage elasticity of labour demand is inelastic. D) There is no longer a trade-off between income and leisure. E) The wage elasticity of labour supply is negative. 13) For a worker who is deciding how many hours of labour to supply, all of the following are
true except that: A) The marginal rate of substitution between income and leisure is equal to the wage rate. B) The rate at which she is willing to exchange leisure for income equals the rate at which the market allows her to do it. C) The slope of the budget line equals the slope of the indifference curve. D) The income effect of a wage change equals the substitution effect. E) The worker cannot increase total utility by working more or fewer hours. 14) Which of the following statements most closely applies to the labour force participation
decision? A) It consists of the choice to allocate a portion of one's time to labour market activities as opposed to non-market activities. B) It occurs when one accepts an employment position and is working. C) It occurs when one is actively seeking work. D) It includes paid and unpaid work. E) It doesn't include unemployed workers. 15) The portion of the population that is surveyed as potential labour force participants consists
of: A) B) C) D) E)
the civilian non-institutional population. the unemployed plus the employed population. the entire civilian population that is 15 years of age or older. Individuals who do hold jobs the entire population of Canada.
16) Which of the following statements applies to the unemployed population? A) They are either unable to work, or are on strike. B) They are jobless. C) They are jobless but are actively seeking work. D) They are working fewer hours than they would like to. E) They are working but are underpaid.
17) Which of the following groups of workers are considered to be part of the labour force? A) Full-time students B) The hard-core unemployed C) Discouraged workers D) Members of the Canadian military E) Homemakers 18) What is an approximate figure for the labour force participation rate in Canada? A) 40% B) 50% C) 65% D) 80% E) It cannot be determined, as there are no reliable data available. 19) When examining cross-national data on labour force participation rates, which of the
following phenomena are apparent? A) That higher income countries tend to have higher rates than do lower-income countries B) That these rates for women tend to be higher than they are for men C) That higher income countries tend to have lower rates D) That men in higher income countries have much higher rates than men in lowerincome countries E) That women in higher income countries have much higher rates than women in lower-income countries 20)
The expression for the unemployment rate (UR) is: A) UR = (employed−unemployed)/unemployed B) UR = (employed−unemployed)/labour force C) UR = unemployed/labour force D) UR = (unemployed/employed) E) UR = (unemployed/population)
21) Data on the distribution of the usual number of hours worked per week indicates that: A) almost all workers work about 40 hours B) there is greater variation among women than among men C) most part-time workers work about 20 hours D) men are more likely to work part time than women E) None of these above
22) The wage rate at which the individual worker is indifferent between participating and not
participating in the labour force is called the: A) indifference wage. B) minimum wage. C) reservation wage. D) utility wage. E) participating wage. 23) An increase in non-market income will have which of the following effects? A) An upward shift in the income constraint B) A downward shift in the income constraint C) A clockwise rotation in the income constraint, making it steeper D) A counter-clockwise rotation in the income constraint, making it flatter E) There is no change to the income constraint.
24) Which of the following diagrams corresponds to a budget line that involves overtime hours
with a wage premium?
A) B) C) D) E)
(a) (b) (c) (d) None of these above
25) Which of the diagrams given below corresponds to a budget constraint with some non-labour
income?
A) B) C) D) E)
(a) (b) (c) (d) None of these above
26) Which of the diagrams given below corresponds to a budget line that involves a wage
increase?
A) B) C) D) E)
(a) (b) (c) (d) None of these above
27) Which of the diagrams given below corresponds to a budget line that involves an increase in
non-labour income?
A) B) C) D) E)
(a) (b) (c) (d) None of these above
28) In the basic income-leisure model, what is indicated by a parallel shift of the budget line? A) The substitution effect B) The total effect of a price change C) A change in the preferences D) The income effect of either a price change or an income change E) The reservation wage
29) Our income-leisure model suggests that if a worker is moonlighting, then: A) She is underemployed. B) She is unemployed. C) she receives an overtime premium. D) She is overemployed. E) There is no income effect 30) Our income-leisure model suggests that if a worker is working overtime, then: A) she Is underemployed. B) she is overemployed. C) if she is paid the straight-time equivalent, she will work more hours than over-time
hours. D) If she earns over-time premium, which leads to a greater income effect than substitution effect. E) There is no substitution effect 31) Which of the following statements regarding indifference curves is true? A) If an individual has a lower valuation of leisure, then the slope of his indifference
curve is steeper. B) If an individual has a lower valuation of leisure, then the marginal rate of substitution of consumption over leisure is higher. C) If an individual has a higher valuation of consumption, then the slope of his indifference curve is flatter. D) If an individual has a higher valuation of consumption, then the marginal rate of substitution of consumption over leisure is higher. E) None of these above 32) In the basic income-leisure model, how is the labour supply curve derived? A) By varying the slope of the income constraint, finding the point of tangency with the
indifference curve, and reading the quantity of hours worked off of the horizontal axis B) By varying the position of the indifference curve, finding the point of tangency with the income constraint, and reading the quantity of hours worked off of the horizontal axis C) By varying the slope of the income constraint, finding the point of tangency with the indifference curve, and reading the wage off of the vertical axis D) By varying the position of the indifference curve, finding the point of tangency with the income constraint, and reading the wage off of the vertical axis E) By varying the intercept of the income constraint, finding the point of tangency with the indifference curve, and reading the quantity of hours worked off of the horizontal axis
33) Which of the following statements regarding the added worker effect is true? A) It resembles moonlighting B) It works in a similar way as the discouraged worker effect C) It tends to boost labour force participation when unemployment is low D) It tends to reduce labour force participation when unemployment is high E) It tends to boost labour force participation when unemployment is high 34) Consider a worker who is supplying a positive number of hours. What could cause him to
drop out of the labour force? A) A flattening of her indifference curve B) A change in preferences such that he values income more C) A decrease in non-labour income D) An increase in the offered wage E) A decrease in the offered wage 35) Consider a worker who is working a second job at lower pay because she needs to pay her
mortgage payments. This choice is most closely associated with: A) A reservation wage effect B) A substitution effect C) An income effect D) A labour force participation effect E) A backward bending supply curve 36) Consider a worker who is working overtime hours in order to take advantage of the pay
premium, even though she does not really feel like it. This choice is most closely associated with: A) A reservation wage effect B) A substitution effect C) An income effect D) A labour force participation effect E) A backward bending supply curve
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 37) A major and recurring theme of this textbook is the role of empirical research in labour economics. Conceptual models exist to analyze many labour market phenomena, but often the predictions that emerge are ambiguous. It is the objective of empirical research to test the validity of these predictions, and to try to sort out the multiple effects, which may work simultaneously. Such is the case for the theory of individual labour supply. Discuss the major conceptual implications of this model as well as the results from the empirical literature with correspond to them. The key is to link the predictions, which flow from the model, to the hypotheses that have been examined in the literature. In particular, your response can follow the following outline: • Without getting bogged down in technical details (i.e., don't give a graph), explain intuitively the role of preferences and constraints in determining the optimal choice of hours worked. • What is the impact on the choice of hours worked by an individual if the level of nonmarket income changes? • Briefly describe the income effect and the substitution effect of a wage change, and relate this to the backward bending supply curve. • A large number of econometric studies have estimated the shape of the labour supply curve, the sign of the wage elasticity of labour supply, and the income elasticity of labour supply. What have they found, generally speaking, regarding the slope of the supply curve? Does the slope differ between men and women? • Figure 2.3 in the textbook shows what appears to be a slight negative empirical relationship across countries between per capita national income and male labour force participation rates, coupled with a slight positive empirical relationship across countries between per capita national income and female labour force participation rates. It might be possible to interpret these observed empirical patterns in terms of substitution effects and income effects.
SECTION BREAK. Answer all the part questions. 38) The figure below pertains to questions 2.1, 2.2, and 2.3.
38.1)
Given a wage increase from W0 to W1, the distance between L' and L1 represents: The substitution effect The income effect The combined effect of both the substitution effect and the income effect The equilibrium choice for hours worked The equilibrium choice for leisure
A) B) C) D) E) 38.2)
Given a wage increase from W0 to W1, the distance between L' and L0 represents: A) The substitution effect B) The income effect C) The combined effect of both the substitution effect and the income effect D) The equilibrium choice for hours worked E) The equilibrium choice for leisure
38.3)
Given a wage increase from W0 to W1, the distance between I1 and I0 represents: A) The substitution effect B) The income effect C) The combined effect of both the substitution effect and the income effect D) The equilibrium choice for hours worked E) The equilibrium choice for leisure
Answer Key Test name: chapter 2 1) D 2) A 3) A 4) E 5) B 6) B 7) C 8) E 9) C 10) A 11) D 12) E 13) D 14) A 15) C 16) C 17) B 18) C 19) A 20) C 21) B 22) C 23) A 24) C 25) A 26) B 27) D 28) D 29) A 30) B 31) C 32) A 33) E 34) E 35) C 36) B 37) Short Answer
The consumer choice model is used to analyze an individual's labour supply decision. Consumers' preferences are represented by the indifference curve of consumption and leisure. Consumers' constraints are given by their wage income from working hours as well as a time constraint which is a combination of working hours and leisure hours. Consumers' objective is to maximize their total utility from consumption by choose their preferred combination of income/consumption and leisure, as represented by their opportunity set or budget constraint. If this optimum occurs at zero hours of work, the individual does not participate. If optimal hours are positive, the individual participates, and the marginal rate of substitution between leisure and consumption equals to the wage rate. The reservation wage is given by the marginal rate of substitution between leisure and consumption, at zero hours of work, which is a critical wage in determining the participation decision. For wage above the reservation wage, the consumer will choose to work. Otherwise, the consumer will not participate. The budget constraint of a consumer is composed of two parts: non-labour income and wage income from total working hours. Therefore the change of non-labour income and wage rate will affect a consumer's labour supply decision. If non-labour income increases, there will be a pure income effect, an individual who choose not to participate before will remain out of participation and an individual who has positive working hours will reduce his/her working hours and enjoy more leisure time. The change of the wage rate, however, will have a more complex effect on one's labour supply decision. For those who do not participate before, if the increase of the wage rate exceeds the reservation wage, they will choose to participate and the working hours is determined by the marginal rate of substitution of consumption and leisure and the wage rate. For those individuals who already work positive hours, a wage increase will have both income and substitution effect. An income effect from wage increase will induce more leisure and less working hours and a substitution effect (from the increase of the opportunity cost of leisure) will induce more working hours and less leisure. The overall effect of labour supply depends on the relative magnitudes of the two. This result is important to explain why labour supply curve can be backward binding. For an individual, the initial small increase of the wage rate may have a dominated substitution effect, which leads him/her to work more hours, however, as wage grows higher and higher, income effect grows larger and may become greater in magnitudes than the substitution effect, therefore, the individual will eventually reduce his/her working hours. The empirical evidences on the estimate of elasticity of labour supply have further proved the results from income-leisure model. The shape of the labour supply curve really depends on the relative magnitudes of the income elasticity and compensated (substitution effect) elasticity. For example, Hansson and Stuart (1985) have summarized that, the overall elasticity of labour supply from a wage change is 0.10, uncompensated elasticity is about 0.25 and income elasticity is about -0.15. However, male and female may have a different labour supply schedule. Generally, for males, the labour supply schedule is likely to be slightly backward bending. For females, the labour supply schedule is more strongly forward sloping, shown a strong positive substitution elasticity outweighing the weak negative income elasticity. This empirical evidence
can also be used in explaining the fact that the male participation rate is generally declining with national income and women's participation rises with nation income (Figure 2.3). For countries that average income is higher, higher wage rate induced strong income elasticity for males and strong substitution elasticity for females, which leads to lower participation rate for males and higher participation rate for females. 38) Section Break 38.1) B 38.2) A 38.3) C
Chapter 3: Labour Supply and Public Policy: Work Incentive Effects of Alternative Income Maintenance Schemes MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 39) All of the following government programs are types of income maintenance programs except: A) social assistance. B) unemployment insurance. C) Child care subsidies D) negative income tax schemes. E) wage subsidy. 40) All of the following are sources of concern with income maintenance programs except that: A) They might reduce wages. B) They might reduce work incentives. C) They might be fiscally costly. D) They might increase wages. E) They might lower employment. 41) All of the following describe a demogrant except: A) an income grant to a specific demographic group B) the simplest income maintenance program C) A grant whose amount varies with the worker's wage D) a lump-sum transfer E) That it shifts the potential income constraint vertically upward 42) Which of the following programs is an example of a demogrant? A) Old Age Security (OAS) B) Canada Pension Plan (CPP) Benefits C) Quebec Pension Plan (QPP) Benefits D) The Child Tax Benefit E) The Guaranteed Income Supplement
43) Which of the following is NOT a way to improve work incentives for welfare recipients? A) Increase the market wages for jobs for which welfare recipients might be qualified to
perform. B) Reduce the very high implicit tax rate that is applied to earnings of welfare recipients. C) Alter the preferences that certain recipients might have for leisure compared to work. D) Raise the benefit level. E) Provide welfare recipients with job training and counselling services. 44) In the income-leisure framework, the impact of a demogrant payment involves which of the
following? A) Only a substitution effect B) Only an income effect C) Both a substitution and an income effect D) A reservation wage effect E) No impact on incentives at all 45) Approximately how generous are social assistance payments? A) About half of the official poverty line B) About two-thirds of the official poverty line C) About three quarters of the official poverty line D) About the same level as the official poverty line E) Above the official poverty line 46) What does the term negative refer to in a negative income tax scheme? A) The individual does not have to pay income tax for any of his/her earnings. B) The individual receives a subsidy or a credit rather than paying taxes for a certain
number of hours worked. C) The program does not involve any disincentives to working. D) The program involves fewer disincentives to working than does a conventional welfare or social assistance program. E) None of the choices are correct
47) The difference between a conventional welfare program and a negative income tax program
is that: A) Recipients in the negative income tax program can receive labour market income
without having all of their benefits clawed back B) For the negative income tax program, the benefits received have to be repaid once the worker is working full time for wages. C) Individuals have to be living below the poverty line in order to qualify for the negative income tax program. D) The former type of program is transferred to the recipient by the government, while the latter is taxed away from the recipient by the government. E) For the negative income tax program, the worker receives a wage supplement for each hour that he/she works. 48) Which of the following situations is depicted in this figure? G refers to a government benefit
payment.
A) B) C) D) E)
The absence of any income maintenance scheme The Canadian Employment Insurance scheme The wage subsidy scheme The conventional welfare program The negative income tax scheme
49) Which of the following statements regarding the negative income tax scheme is true? A) There is no substitution effect involved B) It reduces work incentives relative to the situation of conventional welfare C) It reduces work incentives relative to the situation of no welfare D) It increases work incentives relative to the situation of no welfare E) It is neutral as far as work incentives are concerned, but it makes recipients better off 50) For which of the following programs does the recipient receive a supplement from the
government for each hour worked? A) A wage subsidy program B) A negative income tax program C) A work-sharing program D) An unemployment insurance program E) Guaranteed Income Supplement 51) Which of the following statements concerning the work incentive (or disincentive) effects
under a wage subsidy program is true? A) It strengthens the incentives to work B) It is ambiguous as far as the number of hours worked is concerned C) It could make the worker worse off D) The substitution effect works in the same direction as the income effect E) It is targeted to the population in need 52) Which of the following programs is superior in terms of its ability to direct payments to those
individuals or families in greatest need of assistance? A) Social assistance or welfare B) Unemployment insurance C) Wage subsidies D) Canada Pension Plan E) None of the choices are correct 53) Empirical research regarding the incentive effects of welfare programs and tax changes
applied to the earnings of low-income workers has indicated that: A) Incentives are irrelevant to their labour force participation decisions B) No conclusions can be drawn due to the complex nature of the subject C) There is little response to changes in these tax rates D) Disincentives exist as far as labour force participation is concerned E) None of the above
54) What is the approximate rate at which lost earnings are replaced by Canada's unemployment
insurance system? A) 100% of all earnings up to a certain threshold, and 0% for wages above that level B) 75% of all earnings C) 55% of all earnings D) 55% of all earnings up to a certain threshold, and 0% for wages above that level E) 0% of earnings up to a certain threshold, and 55% for wages above that level 55) The reason for which worker's disability insurance can potentially have adverse effects on
work incentives is that: A) the income that it provides enables one to reach a certain income level without any work obligation. B) the opportunity cost of leisure increases. C) the recipient is allowed to work as many hours as he/she can without losing any of the benefits. D) the taxes that finance the benefits can have negative effects on labour demand. E) All of the answer choices are correct. 56) Consider a worker who has small children. All of the following are effects ofincurring child
care expensesexcept: A) that they increase reservation wages. B) that they might decrease labour force participation. C) that they increase the hours of work for labour market participants. D) that they reduce the hours of work for labour market participants. E) None of the above, as they are all effects. 57) What is the effect of a demogrant on the budget constraint? A) It shifts the budget line outward. B) It makes the budget line flatter C) It makes the budget line steeper D) It places a kink in the budget line E) It changes the shape of the indifference curve 58) The Canadian Employment Insurance Program is best known for its generosity towards: A) Long-term unemployed workers B) Older unemployed workers C) High-wage unemployed workers D) Seasonally unemployed workers E) No particular group of unemployed workers
59) The Canadian Employment Insurance program has what impact on labour supply? A) It decreases it B) It increases it C) Little influence D) Uncertain E) It increases it in one respect, but decreases it in another 60) Which of the following statements concerning subsidies for child care expenses is true? A) They change the slope of the budget line. B) They reduce the fixed costs of working. C) They discourage labour force participation. D) They tend to increase the reservation wage of working. E) They cause a strong substitution effect toward more working activity. 61) Which of the following factors may affect the welfare participation rate for the entire
population? A) The level of the basic benefit B) Unemployment rate C) The view of the political party in power D) the age composition of the population E) All of the above choices are correct 62) Non-experimental evidence regarding participation in welfare has suggested that: A) most people who initiate welfare benefits will leave welfare in one year. B) most people who initiate welfare benefits will stay on welfare after one year. C) the longer one is on welfare, the more likely one is to leave. D) individuals with low predictable earnings and relative temporary characteristics are
less likely to use welfare. E) Incentives do not appear to matter 63) Suppose that a worker says that due to a refundable tax benefit, it appears to her that working
pays more than it used to, and so she wants to work longer hours. What type of effect is involved? A) Only a substitution effect B) Only an income effect C) Both a substitution and an income effect D) A reservation wage effect E) No impact on incentives at all
64) Suppose that the social assistant benefit that worker receives is reduced, as and such he can
no longer pay his rent. He therefore decides that he must work longer hours. What type of effect is involved? A) Only a substitution effect B) Only an income effect C) Both a substitution and an income effect D) A reservation wage effect E) No impact on incentives at all 65) What is a difference between employment insurance and disability insurance programs? A) The income-leisure framework cannot be applied to the case of disability insurance B) The two situations are quite similar. C) There are no disincentives involved with disability insurance D) With disability insurance, the recipient could potentially have a higher level of
welfare than she did before the condition occurred E) There are no income effects involved with disability insurance SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 66) Congratulations! You have just been appointed to be the social policy czar by the prime minister. Your mission, whom you have no choice but to accept, is to reform these programs because they are presently not affordable and rife with inefficiencies. There is one fundamental issue that underlies the reform of workers' compensation, welfare/social assistance, and unemployment insurance, and that is the conflicting objectives of providing adequate income protection on one hand and providing a more efficient incentive structure on the other hand. • Explain the nature of the disincentive effects that are involved with demogrant payments and the disincentive effects that are involved with tax and/or subsidy measures that vary directly with the number of hours worked. Do not get bogged down in technical details, and do not give graphs. Your response should be set in the framework of the labour supply model, which means a discussion of the income effect and the substitution effects. • Explain the motivation of two variants of social assistance programs, the negative income tax program and wage subsidies. How are they supposed to improve the incentive structure? Restrict your analysis to an intuitive explanation of the economic behavioural mechanisms.
SECTION BREAK. Answer all the part questions.
67)67) 67.1)
The four diagrams depict various ways to affect the incentive structure that is inherent in welfare programs. Which one shows the impact of increasing the offered wage rate? A) Top left B) Top right C) Bottom left D) Bottom right
67.2)
The four diagrams depict various ways to affect the incentive structure that is inherent in welfare programs. Which one shows the impact of reducing the implicit tax rate? A) Top left B) Top right C) bottom left D) bottom right
67.3)
The four diagrams depict various ways to affect the incentive structure that is inherent in welfare programs. Which one shows the impact of changing preferences such that recipients value labour market activity more? A) Top left B) Top right C) bottom left D) bottom right
68) The following diagrams of budget constraints pertain to the next three questions. The vertical
axis is Income and the horizontal axis is Leisure.
Figure a)
Figure b)
Figure c)
Figure d)
68.1)
Which of the diagrams of budget constraints above depicts the Earned Income Tax Credit program? A) a) B) b) C) c) D) d)
68.2)
68.3)
Which of the diagrams of budget constraints above depicts the Wage Subsidy program? A) a B) b C) c D) d
Which of the diagrams of budget constraints above depicts the Negative Income Tax program? A) a B) b C) c D) d