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Consider a labour market without any government subsidy and where the market wage is equal to w and all workers are endowed with the same total amount of time T.
a) The government, in an attempt to encourage labor supply, decides to introduce an employment-conditional benefit, namely a subsidy of 4 for each hour worked up to a maximum of 8 hours per day (i.e. if one works 9 hours one only get the subsidy for the first 8 hours). Write down and represent graphically the budget constraint before and after the introduction of the subsidy.
b) Discuss the effects of the subsidy on labor supply. Are there people who were not working and decide to start working due to the subsidy? Are there people who were already working and who choose to increase (decrease) their supply of labor? Motivate your answer by drawing the indifference curves of different types of agents.
c) Assume now that the government decides to change the program and offers an overall subsidy of 15 to anyone working at least 5 hours per day. Answer questions a) andb) under this alternative welfare program.
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