Labour Market Economics 8Th Canadian Edition By Dwayne Benjamin

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Sample Test

Chapter 03

Labour Supply and Public Policy: Work Incentive Effects of Alternative Income Maintenance Schemes

Multiple Choice Questions

1. All of the following government programs are types of income maintenance programs except:
A.social assistance.
B. unemployment insurance.
C. the child tax credit.
D. negative income tax schemes.
E. wage subsidy.

Blooms: Remember
Difficulty: Easy
Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits.
Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints.
Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework.
Topic: 03-01 Static Partial Equilibrium Effects in Theory

2. All of the following are sources of concern with income maintenance programs except that:
A.They might reduce wages.
B. They might reduce work incentives.
C. They might be fiscally costly.
D. They might increase wages.
E. They might lower employment.

Blooms: Understand
Difficulty: Easy
Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits.
Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints.
Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework.
Topic: 03-01 Static Partial Equilibrium Effects in Theory

3. All of the following describe a demogrant except?
A.an income grant to a specific demographic group
B. the simplest income maintenance program
C. A grant whose amount varies with the worker’s wage
D. a lump-sum transfer
E. A demogrant shifts the potential income constraint vertically upward by the amount of the grant.

4. Which of the following programs is an example of a demogrant?
A.Old Age Security (OAS)
B. Canada Pension Plan (CPP) Benefits
C. Quebec Pension Plan (QPP) Benefits
D. The Child Tax Benefit
E. The Guaranteed Income Supplement

5. Which of the following is NOT a way to improve work incentives for welfare recipients?
A.Increase the market wages for jobs for which welfare recipients might be qualified to perform.
B. Reduce the very high implicit tax rate that is applied to earnings of welfare recipients.
C. Alter the preferences that certain recipients might have for leisure compared to work.
D. Raise the benefit level.
E. Provide welfare recipients with job training and counselling services.

Blooms: Analyze
Difficulty: Medium
Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits.
Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints.
Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework.
Topic: 03-03 Welfare

6. Another term for a guaranteed annual income plan is:
A.a minimum income policy.
B. a negative income tax.
C. a child tax benefit.
D. total job security.
E. social insurance.

7. What does the term negative refer to in a negative income tax scheme?
A.The individual does not have to pay income tax for any of his/her earnings.
B. The individual receives a subsidy or a credit rather than paying taxes for a certain number of hours worked.
C. The program does not involve any disincentives to working.
D. The program involves fewer disincentives to working than does a conventional welfare or social assistance program.
E. None of the choices are correct

Blooms: Understand
Difficulty: Medium
Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits.
Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints.
Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework.
Topic: 03-04 Negative Income Tax

8. The difference between a conventional welfare program and a negative income tax program is that:
A.Recipients in the negative income tax program will receive more from the guarantee income than they will pay out in taxes.
B. For the negative income tax program, the benefits received have to be repaid once the worker is working full time for wages.
C. Individuals have to be living below the poverty line in order to qualify for the negative income tax program.
D. The former type of program is transferred to the recipient by the government, while the latter is taxed away from the recipient by the government.
E. For the negative income tax program, the worker receives a wage supplement for each hour that he/she works.

9. For which of the following programs does the recipient receive a supplement from the government for each hour worked?
A.A wage subsidy program
B. A negative income tax program
C. A work-sharing program
D. An unemployment insurance program
E. Guaranteed Income Supplement

10. Which of the following statements concerning the work incentive (or disincentive) effects under a wage subsidy program and under a negative income tax program is true?
A.The negative income tax program is neutral in regards to these effects.
B. The wage subsidy program is neutral in regards to these effects.
C. Both these programs have the same effects in this regard.
D. The negative income tax program has a greater positive effect on the incentive to work.
E. The wage subsidy program has a greater positive effect on the incentive to work.

Blooms: Analyze
Difficulty: Hard
Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits.
Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints.
Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework.
Topic: 03-05 Wage Subsidies and Refundable Tax Credits

11. Which of the following programs is superior in terms of its ability to direct payments to those individuals or families in greatest need of assistance?
A.Social assistance or welfare
B. Unemployment insurance
C. Wage subsidies
D. Canada Pension Plan
E. None of the choices are correct

12. What is the approximate rate at which lost earnings are replaced by Canada’s unemployment insurance system?
A.100% of all earnings up to a certain threshold, and 0% for wages above that level
B. 75% of all earnings
C. 55% of all earnings
D. 55% of all earnings up to a certain threshold, and 0% for wages above that level
E. 0% of earnings up to a certain threshold, and 55% for wages above that level

Blooms: Remember
Difficulty: Medium
Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits.
Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints.
Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework.
Topic: 03-06 Employment Insurance

13. The reason for which worker’s disability insurance can potentially have adverse effects on work incentives is that:
A.the income that it provides enables one to reach a certain income level without any work obligation.
B. the opportunity cost of leisure increases.
C. the recipient is allowed to work as many hours as he/she can without losing any of the benefits.
D. the taxes that finance the benefits can have negative effects on labour demand.
E. All of the answer choices are correct.

14. Consider a worker who has small children. All of the following are effects of child care expenses except:
A.that they increase reservation wages.
B. that they might decrease labour force participation.
C. that they increase the hours of work for labour market participates.
D. that they reduce the hours of work for labour market participates.
E. that they might increase labour force participation.

The following diagrams of budget constraints pertain to the next three questions. The vertical axis is Income and the horizontal axis is Leisure.

Figure a

Figure b

Figure c

Figure d

15. Which of the diagrams of budget constraints above depicts the Earned Income Tax Credit program?
A.a
B. b
C. c
D. d

16. Which of the diagrams of budget constraints above depicts the Wage Subsidy program?
A.a
B. b
C. c
D. d

17. Which of the diagrams of budget constraints above depicts the Negative Income Tax program?
A.a
B. b
C. c
D. d

18. What is the effect of a demogrant on the budget contraint?
A.It shifts the budget line outward.
B. It makes the budget line flatter
C. It makes the budget line steeper
D. It places a kink in the budget line
E. It changes the shape of the indifference curve

19. Which of the following statements concerning subsidies for child care expenses is true?
A.They change the slope of the budget line.
B. They reduce the fixed costs of working.
C. They discourage labour force participation.
D. They tend to increase the reservation wage of working.
E. They cause a strong substitution effect toward more working activity.

20. Which of the following factors may affect the welfare participation rate?
A.The level of the basic benefit
B. Unemployment rate
C. The view of the political party in power
D. The total number of caseload
E. All of the above choices are correct

Blooms: Remember
Difficulty: Easy
Learning Objective: 03-04 Discuss the key challenges to estimating the “real world” effects of income maintenance programs on work incentives.
Learning Objective: 03-05 Evaluate the potential validity or shortcomings of empirically based arguments concerning the merits of one income maintenance program versus another, and to be able to cite representative studies from the empirical economics literature.
Topic: 03-09 Illustrative Evidence of Incentive Effects

21. Nonexperimental evidence has suggested that:
A.most people who initiate welfare benefits will leave welfare in one year.
B. most people who initiate welfare benefits will stay on welfare after one year.
C. the longer one is on welfare, the more likely one is to leave.
D. individuals with low predictable earnings and relative temporary characteristics are less likely to use welfare.
E. individuals with low predictable earnings and relative permanent characteristics are less likely to use welfare.

Blooms: Remember
Difficulty: Medium
Learning Objective: 03-04 Discuss the key challenges to estimating the “real world” effects of income maintenance programs on work incentives.
Learning Objective: 03-05 Evaluate the potential validity or shortcomings of empirically based arguments concerning the merits of one income maintenance program versus another, and to be able to cite representative studies from the empirical economics literature.
Topic: 03-10 Nonexperimental Evidence

22. Since 1990, the welfare benefit rate in Ontario has shown:
A.an increasing trend.
B. a decreasing trend.
C. an increasing then decreasing trend.
D. a decreasing then increasing trend.
E. no trend.

23. As American economic condition worsens in 2008, we can expect all following changes, except:
A.an increase in the unemployment rate.
B. an increase in the welfare caseload
C. an increase in the basic benefit of welfare
D. an increase in the welfare beneficiary rate
E. a decrease in the job vacancy rate

Blooms: Understand
Difficulty: Medium
Learning Objective: 03-04 Discuss the key challenges to estimating the “real world” effects of income maintenance programs on work incentives.
Learning Objective: 03-05 Evaluate the potential validity or shortcomings of empirically based arguments concerning the merits of one income maintenance program versus another, and to be able to cite representative studies from the empirical economics literature.
Topic: 03-09 Illustrative Evidence of Incentive Effects

24. Based on Reference 03-02, we can estimate that the impact of the program on labour market participation is:
A.30 percent.
B. 24 percent.
C. 15 percent.
D. 9 percent.
E. 6 percent.

Blooms: Apply
Difficulty: Hard
Learning Objective: 03-04 Discuss the key challenges to estimating the “real world” effects of income maintenance programs on work incentives.
Learning Objective: 03-05 Evaluate the potential validity or shortcomings of empirically based arguments concerning the merits of one income maintenance program versus another, and to be able to cite representative studies from the empirical economics literature.
Topic: 03-11 Experimental Evidence

Essay Questions

25. Congratulations! You have just been appointed to be the social policy czar by the prime minister. Your mission, whom you have no choice but to accept, is to reform these programs because they are presently not affordable and rife with inefficiencies. There is one fundamental issue that underlies the reform of workers’ compensation, welfare/social assistance, and unemployment insurance, and that is the conflicting objectives of providing adequate income protection on one hand and providing a more efficient incentive structure on the other hand.

· Explain the nature of the disincentive effects that are involved with demogrant payments and the disincentive effects that are involved with tax and/or subsidy measures that vary directly with the number of hours worked. Do not get bogged down in technical details, and do not give graphs. Your response should be set in the framework of the labour supply model, which means a discussion of the income effect and the substitution effects.
· Explain the motivation of two variants of social assistance programs, the negative income tax program and wage subsidies. How are they supposed to improve the incentive structure?
Restrict your analysis to an intuitive explanation of the economic behavioural mechanisms.

The income-leisure framework is a useful way to analyze work incentive effects from different income maintenance programs. The budget constraint of a consumer is composed of two parts: non-labour income and wage income from total working hours. Therefore the change of non-labour income and wage rate will affect a consumer’s labour supply decision. If non-labour income increases, there will be a pure income effect, an individual who choose not to participate before will remain out of participation and an individual who has positive working hours will reduce his/her working hours and enjoy more leisure time. The change of the wage rate, however, will have a more complex effect on one’s labour supply decision. For those who do not participate before, if the increase of the wage rate exceeds the reservation wage, they will choose to participate and the working hours is determined by the marginal rate of substitution of consumption and leisure and the wage rate. For those individuals who already work positive hours, a wage increase will have both income and substitution effect. An income effect from wage increase will induce more leisure and less working hours and a substitution effect (from the increase of the opportunity cost of leisure) will induce more working hours and less leisure. The overall effect of labour supply depends on the relative magnitudes of the two.
Demogrants are pure lump-sum transfers, based only on immutable individual characteristics like age or sex. While these transfers are independent of income, they will still have adverse work incentive effects as long as leisure is a normal good. Demogrant payments will directly add to non-labour income part of the budget constraint, which will induce a pure income effect. The individual choose not to participate in the labour market will remain out of workforce and for individual who has positive working hours, he/she will reduce work hours or if the income effect is large enough, withdrawing from the workforce.
In general, welfare programs are designed to increase the income of individuals with low income. Because welfare payments lead to income effect, all programs have adverse work incentive effects. The degree to which they have adverse work incentive effects depends on how strictly benefits are reduced in response to higher earnings.
Negative income taxes are proposed as an alternative to welfare programs with steep earnings tax-back rates. It composed of two parts: the first part is the basic guarantee income, which adds to the non-labour income part of the budget constraint, and the effect of that is work-reducing income effect; the second part is the implicit tax, any labour market earnings will subject to an implicit tax rate. The tax rate reduces the recipient wage rate and induce both income and substitution effect. In most cases, the dominated substitution effect will lead to fewer hours worked. As with the demogrant and welfare, at the point of maximum leisure, the basic income guarantee shifts the potential income constraint upward by the amount of the guarantee: even if the individual does not work, she has positive income equal to the amount of the guarantee. Unlike welfare, as the individual works, income assistance is not reduced by the full amount of labour market earnings. However, income support does decline as income from work increases; thus, labour market earnings are subject to a positive implicit tax rate. Take-home pay does not rise as fast as labour market earnings; hence, the income constraint under the negative income tax plan is less steeply sloped than the original labour market income constraint.

Wage subsidies are targeted directly to the working poor. In this program, additional earnings are added directly to the wage rate to encourage higher participation and more working hours. For the recipients, it is exactly like a wage increase. If the person does not work, his income is still zero even though his wage is subsidized. However, as the person works more, his take-home pay rises more under the wage subsidy than if he were receiving only his market wage.
Just as an increase in wages has both an income and a substitution effect working in opposite directions insofar as they affect work incentives, so will the wage subsidy have an ambiguous effect on work incentives. The higher wage means higher potential income from which the individual will buy more of all normal goods, including leisure; hence, work incentives are reduced via the income effect. This income effect will be at work even though the individual has to work to receive the income: the increased leisure could come in the form of reduced hours or longer vacations or periodic withdrawals from the labour force or reduced work from another family member. The higher wage also means that the price (opportunity cost) of leisure has now increased; hence, work incentives are increased via this substitution effect. On net, theory does not indicate which effect dominates; hence, the work incentive effects of a wage subsidy are ultimately an empirical proposition.
Other things being equal (the recipients’ welfare, their post-transfer income, or the size of the subsidy), the adverse work incentive effects of the wage subsidy are not as great as those of the negative income tax. Remember that under a negative income tax plan, both the income and substitution effects go in the direction of reducing hours of work. Work incentives are better under the wage subsidy because it increases the wage by the amount of the subsidy, while negative income tax reduced the wage by the amount of the implicit tax.

Blooms: Create
Difficulty: Medium
Learning Objective: 03-01 Differentiate between different types of income maintenance programs, including demogrants, social assistance, unemployment insurance, earned income tax credits, worker’s compensation, and child care benefits.
Learning Objective: 03-02 Graphically illustrate how key aspects and program parameters of income maintenance programs can be captured by budget constraints.
Learning Objective: 03-03 Using the labour supply (income-leisure) model, analyze and compare the work incentive effects of different income maintenance programs. Also, be able to show how individual well-being can be compared across programs within this framework.
Topic: 03-01 Static Partial Equilibrium Effects in Theory
Topic: 03-02 Demogrant
Topic: 03-03 Welfare
Topic: 03-04 Negative Income Tax
Topic: 03-05 Wage Subsidies and Refundable Tax Credits

Chapter 05

Demand for Labour in Competitive Labour Markets

Multiple Choice Questions
The figures below give the production schedule and the product demand schedule for a firm, which has to decide how many workers to hire.

Workers hired	Total Physical Product	Price of output
0	0	$10
1	10	$10
2	18	$10
3	25	$10
4	30	$10
5	34	$10
6	37	$10

1. If the wage = $40 for the time period in question, then the number of workers hired is:
A. 2
B. 3
C. 4
D. 5
E. 6

Blooms: Analyze
Difficulty: Medium
Learning Objective: 05-01 Understand how firms decide how much labour they need to employ to produce a certain amount of goods or services. The theory of labour demand provides the tools required to understand how firms make these decisions.
Learning Objective: 05-02 Labour demand decisions are made both simultaneously with other input decisions, and after factories and machines have been built. Learn how labour demand decisions differ in these two circumstances, that is, in the short run versus the long run.
Topic: 05-02 Demand for Labour in the Short Run
Topic: 05-03 Wages, the Marginal Productivity of Labour, and Competition in the Product Market

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