The current worker’s compensation system pays employees who are permanently injured on the job a payment of $X per year, whether they work or not. The government has been considering an alternative plan (Plan B) where those who continue to not work receive half the amount ($.5X), but those who return to work would receive half the amount ($.5X) PLUS 50 cents for every hour worked. Of course this would be on top of the wages the employer pays them.
a) Illustrate the budget constraint represented by the current worker’s compensation system.
b) Illustrate the budget constraint represented by Plan B
c) What would be the change in work incentives associated with this change in the way worker’s compensation payments are calculated?