Econ3810 to work or not to work

Disadvantages of welfare programs

Create work disincentives

A Labor supply elasticity greater than 1 is

Elastic as hours of work respond proportionally more than the change in wages

If labor demand is more elastic, then minimum wage will lead to a

Larger decrease in hiring

At wages slightly below the reservation wage, the labor supply curve is ____ sloped

Negatively

No clawback "universal basic income"

- Everyone gets money no matter what - very small work disincentive that operates only through a small income effect - bad targeting

Partial clawback

- For every $ of income you earn, you lose a portion of that in benefits - has a mix of pros and cons from the others - decent targeting

Welfare reduces supply of labor by

- Increase non labor income (income effect) - depending on the program, changing the "wage rate" to be lower as benefits are clawed back (substitution effect)

Full clawback "take it or leave it"

- You lose the cash benefit if you have any work income - leads to a welfare trap that causes individuals to exit the labor force to keep their benefits - good targeting

Labor supply increases as the wage rate increases for 2 reasons

1) as the wage rate increases, some individuals move from not working to working since that wage exceeds their reservation wage 2) those already working could increase their hours work when the wage rate increases

Formula for labor supply elasticity

1/slope x w/h

If labor supply is more elastic, than wage subsidies or effective wage cuts have a

Bigger effect on labor supply

if the income effect begins to dominate the substitution effect, _____declines as the wage rate increases

Hours of work

At wages slightly below the reservation wage, the ____effect dominates the ___ effect

Income Substitution

A labor supply elasticity less than 1 is

Inelastic as hours of work respond proportionally less than the change in wages

sigma =

Percent change hours worked / percent change in wage rate

The elasticity of labor supply or demand is important for

Policy

At wages slightly above the reservation wage, the labor supply curve is ______ sloped

Positive sloped

The labor supply elasticity measures

Responsiveness in hours worked to changes in the wage rate

The _____ usually varies along the supply curve

Slope

The labor supply curve is more inelastic when the slope is ______

Steeper Steeper slope 1/slope is closer to 0 so changes in w lead to little change in labor supply

at wages slightly above the reservation wage, the ______ effect dominates the _______ effect

Substitution income

reservation wage

The lowest wage rate that would make the person indifferent between working and not working. Rule 1: if the market wage is less than the reservation wage, then the person will not work. Rule 2: the reservation wage increases as nonlabor income increases

market labor supply curve

The market labor supply curve is a sum of the individual supply curves

Welfare programs try to reduce poverty by focusing money on

Those with low income This is good because it's less useful to give money to people who don't need it as much - taxpayer $ is scarce