Chapter 2 Labor Econ

What happens to the probability that a particular person works when the wage rises? Does such a wage increase generate an income effect?

An increase in the wage generates both an income and a substitution effect among persons who work. The income effect reduces hours of work; the substitution effect increases hours of work. The labor supply curve, therefore, is upward sloping if substitution effects dominate and downward sloping if income effects dominate.

What happens to the reservation wage if nonlabor income increases and why?

Given that leisure is a normal good, after the increase in non-labor income, reservation wage should increase as well

Why does the earned income tax credit increase the labor force participation rate of targeted groups?

Increases the net wage for those who join the labor force and therefore may push the market wage above the reservation wage

How does a typical worker decide how many hours to allocate to the labor market?

Utility-maximizing workers allocate their time so that the last dollar spent on leisure activities yields the same utility as the last dollar spent on goods

Why do welfare programs create work disincentives?

Welfare programs create work disincentives because they provide cash grants to participants as well as tax those recipients who enter the labor market. In contrast, credits on earned income create work incentives and draw many nonworkers into the labor force