Econ labor market policy evaluation

ECON 370 - Chapter 3 - Labour

Economics

Maggie Jones

Labour Supply and Public Policy

Public Policy

I Canada’s provincial and federal governments implement a number of social programs designed to alleviate poverty

I transfer programs I unemployment insurance I welfare programs I child care subsidies

I About 10% of GDP is spent on income maintenance schemes

Income Maintenance Programs

Public Policy

I Objective of these programs is to alleviate poverty I universal: e.g., transfer everyone a fixed income (most

expensive type of program) I targeted: e.g., transfer enough to low-income individuals so

that they make at least as much as the poverty line

I In any income maintenance program we are concerned about the disincentive e↵ects on labour supply

Types of Income Maintenance

I Transitory income shocks: temporary decline in income I e.g. being laid o↵

I unemployment insurance I e.g. workplace injury

I worker’s compensation I Permanent income shocks: long-term decline in income

I e.g. permanent injury or disability I disability benefits

I e.g. discouraged worker I welfare programs after unemployment insurance is exhausted

I Returning to work: individual’s who have been out of the labour force but plan to return

I e.g. having children I child care subsidies

Types of Income Maintenance

I It turns out there are a number of di↵erent types of income maintenance programs that may have di↵ering e↵ects on a

worker’s labour supply choice

I demogrants, welfare, negative income taxes, wage subsidies, earned income tax credits, employment insurance, disability payments, worker’s compensation, child care subsidies

I We will focus on static partial equilibrium e↵ects I we will ignore dynamic (over time) e↵ects and general

equilibrium (over the economic system) e↵ects

Demogrants

Demogrants

I Income grants tied to specific demographic characteristics (e.g., age, gender, etc.)

I Example: Universal Child Care Benefit (before it became the Canada Child Benefit) paid $160/month for each child under 6

and $60 per month for each child between 6 and 18

Demogrants In co m e

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Welfare

Welfare

I Sometimes called “social assistance” or “income assistance” I Financed in part by the federal government but administered

by provinces

I Payments to non-participants of the labour force; amounts typically based on needs of the family (e.g. family size, city,

etc)

Welfare

Welfare In co m e

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Welfare

I Potential solutions to disincentive e↵ects: I Decrease payment amounts

I Increase market wage

I Reduce implicit tax

I Alter preferences

Negative Income Tax

Negative Income Tax

I Guaranteed income plan plus an implicit tax rate applied to labour market earnings

Y = G + (1 � t) ⇥ W

Negative Income Tax In co m e

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Wage Subsidies and Refundable Tax

Credits

Wage Subsidies and Refundable Tax

Credits

I Alternative to taxing earnings, per-hour wage is supplemented by government

I Essentially can be viewed as an increase in the wage rate, which e↵ectively induces an income and substitution e↵ect.

Wage Subsidies and Refundable Tax

Credits In co m e

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Wage Subsidies and Refundable Tax

Credits

I Work incentives tend to be better under wage subsidy compared to negative income tax because the income and

substitution e↵ects work in opposite directions

I Disadvantage is that it is not helpful for people who legitimately cannot work

I Often wage subsidies are targeted to low-income people I In Canada we have a program called the Working Income

Tax Benefit I received in the form of tax breaks after you fill out income tax

forms

Working Income Tax Benefit

I Implemented in three phases I phase-in: wage subsidy proportional to earnings I flat range: constant subsidy at max wage subsidy I phase-out: negative income tax as earnings reach highest level

Working Income Tax Benefit

Working Income Tax Benefit In co m e

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Employment Insurance

Employment Insurance

I Changes budget constraint faced by individuals I Incentive e↵ects often di↵er based on individual attachment to

the labour market

I Assumption: if individuals want to increase (or decrease) labour supply they can

I E.g. 60% of weekly pay for up to 20 weeks, requires a min. of 14 weeks

Employment Insurance

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Labour Income Benefits Total Income

Disability Benefits and Worker’s

Compensation

Disability Benefits and Worker’s

Compensation

I Social assistance programs designed to compensate individuals who legitimately cannot work

I Work incentives are less of a concern when designing disability benefit and worker’s compensation programs

I There are still instances when we might be concerned about disincentive e↵ects

I The type of program implemented will depend on the nature of the disability or injury

I Depending on the type of disability/injury, the individual’s budget constraint and preferences will be a↵ected di↵erently

Disability Benefits and Worker’s

Compensation

I Ways in which individual labour supply may be a↵ected by disabilities and injuries:

I partially disabling injury could a↵ect time allocated to the labour force, but may not a↵ect performance

I other disabilities may a↵ect productivity (wages) but not time devoted to the labour force

I some disabilities may require expensive medical expenditures I it is also possible for a disability to a↵ect an individual’s

preferences over their labour-leisure allocations

Time Constraints In co m e

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Productivity In co m e

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Medical Expenses In co m e

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Preferences In co m e

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Disability Benefits and Worker’s

Compensation

I As we saw previously, di↵erent policies will have di↵erent e↵ects on labour supply

I Worker’s compensation* I Disability pension entitlements I Long-term disability insurance I Court awards

Worker’s Compensation

Worker’s Compensation

I Designed to soften the negative e↵ects of a temporary disability/injury on wages

I Consider the case where an individual is compensated up to two thirds of the loss of income

I Idea is that as the individual is forced to reduce their labour supply, the negative impact on wages is not as severe

Worker’s Compensation In co m e

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Child Care Subsidy

Child Care Subsidy

I We often think of child care as a fixed cost incurred by the household

I Several types of child care subsidies available (e.g. from in-class discussion readings)

I Imagine a program designed to subsidize child care for those who are employed

I cost incurred only if individual works

Child Care Subsidy In co m e

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Child Care Subsidy In co m e

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Child Care Subsidy In co m e

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