Question

Using a labor/leisure model to show and discuss the income and substitution effects of a rise in wage rate when substitution effect is greater than the income effect. Using this model to analyze implications of employee disability programs How would you address its work disincentive effect?

Answer 1

ANSWER: Generally, in labour supply model The Income effect states that a increase in the wages will lead the workers to work for less number of hours. The reason behind was they can earn more money or more wages in less time.But the Substitution effect states that an increase in the wages results to work for more hours than earlier or before because they will give more value to work rather than staying leisure without any work.

By this we can say that, When the subsitution effect is greater than the income effect the Labour supply would increase due to the increase in the wages.Also due to the employee disability program millions of the disables people are staying out of the market or few people will work for less time because they will receive regular payments from the social security schemes. Here according to this context, the income effect is stronger than the substitution effect because the disabled workers or labour tens to work less because they paid easily.

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