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Suppose that current workers' compensation policy (A) provides employees injured on the job a payment of $X each year whether they work or not. Suppose the government were to implement a new program (B) in which those who did not work at all got ½ $X per year but those who did work got ½ $X plus workers' compensation of 50 cents for every hour worked. So, in other words, the constraint under policy A is the fixed payment plus the wage rate [($X) + W], and under policy B it is [.5($X) + 1.5W].

Graphically depict the wage constraint for (1) no policy, (2) policy A, and (3) policy B.

What impact does policy A have on labor supply compared to no policy at all?

What would be the change in work incentives associated with policy B compared to policy A?

The graph associated with this problem should be large and on a separate sheet of paper. Be sure to calibrate each axis very precisely.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M938679

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