Question

Consider a welfare state that provides a guaranteed income of $12,000 to everyone regardless of income. This benefit is reduced by $1 for each $1 of earned labor income. Policymakers are considering reform the transfer system such that the benefit is now reduced by $1$ for every $2 of earned labor income .

(i) What will the effect of this reform be on the number of hours supplied by individuals?

Show the work.

Answer 1

If the welfare transfers the reforms from $1 for every $1 to $1 for every $2, it gives the opportunity to the worker to double their working hours because the reducing percentage decreases from 100% to 50% and the percentage depends on their earning.

Let assume the earning of welfare is $12000
So the gurantee reduce in first condition $1 for $1 earning	$12000 gurantee reduce
If scheme reforms at $1 for $2 earning	$6000 gurantee reduce
So if we increase and double the working hours shift double to $24000
In scheme $1 for $2 earning	$24000/2
	$12000 which is same as if earning is $12000 for 1st scheme without reforms

So, it means the number of hours of worker can be double.