Welfare_6 - Welfare and Social Insurance Welfare programs...

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1 Labor Supply Applications - Welfare Programs Ch6 pp.192-200 Welfare and Social Insurance Welfare programs and social insurance programs change the budget constraints of workers. A concern for policy makers is that traditional welfare and social insurance programs provide disincentives for workers to work. Some workers who would choose to work in the absence of the programs decide instead to not work. We will use our knowledge of labor supply theory, particularly income and substitution effects to evaluate the programs in terms of the incentives they put on workers. Income Replacement Programs Income replacement programs e.g. workers’ compensation insurance e.g. unemployment insurance Replace earnings lost due to injury, disability or layoff. Pay benefits ONLY to those who are not working. Consider a workers’ comp program that pays workers their pre-injury earning for as long as they are off work. Suppose pre-injury earnings were E 0 . Also, suppose the worker typically worked 8 hour days. After the injury, the worker can choose to work zero hours and earn E 0 dollars. Budget Constraint – Injured Worker The worker can choose any point on her previous budget constraint (by going back to work) or she can choose to work zero hours and earn E 0 . 16 23 24 leisure consumption 24*W E 0 After the worker has recovered, would she choose to go back to work, or remain on disability? E 0 zero work hours, disability payment Budget constraint with spike Net Wage - Definition The worker’s wage is the additional income a worker can receive from her employer by working an additional hour.
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