Suppose that the way that the workers’ compensation system currently works is th

Question

Suppose that the way that the workers’ compensation system currently works is that an employee permanently injured on the job receives a payment of $X a year each year, regardless of whether he works or not. Suppose the government implements a reform of the program in which those permanently injured workers who did not work at all get a payment of $X/2 a year and those that do work receive a payment of $X/2 per year plus an additional payment of $1.00 an hour for each hour they do work (above and beyond the wage that their employers pay them). Would hours of work for permanently injured workers likely increase or decrease under the reformed program? In answering this question assume that all permanently injured workers can earn a wage of $W an hour.

Explanation / Answer

The income (from 0 work) has reduced to half for those who are permanently injured and do not work so it will induce them to work. And a additional income of $1 per hour will also motivate these injured employees to work more.

But if income effect is more efficient and effective then people may want to work less i.e. this additional $1 may lead then to work less (But practically $1 is a small amount to have substantial effect)

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