5) Consider two antipoverty programs, AFDC and EITC, and there affects on labor

Question

5) Consider two antipoverty programs, AFDC and EITC, and there affects on labor supply. a) Assume AFDC gives a weekly payment of nonlabor income while effectively reducing a participants wage by half. How would income effects change a workers consumption/leisure decision? How would substitution effects change a workers consumption/leisure decision? What would happen to a participants reservation wage? b) Assume EITC simply increases a poor workers wage. How would income effects change a workers consumption/leisure decision? How would substitution effects change a workers consumption/leisure decision? What would happen to a participants likelihood of participating in the labor force?

Explanation / Answer

a) When AFDC starts giving weekly non labor payment to labors, their utility arriving from leisure increases. With such change the labor will then spend more hours to leisure by substtuting these hours from work. Hence less working hours will be there and more leisure hours will be threre due to which aprticipation rate declines.

Reservation wage would increase as they are getting more utility from leisure in form of some non labor earnings, hence to induce them to work income higher woud be require.

b) When EITC increases poor worker's wage, he wil get more uility by getting more hours into labor. To which he will substitue few hours from leisure to work and accordigly participant reservation wage would fall as lesser income would also induce them to work because of extra icome coming from EITC for doing work.

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.