Question

1. You have just been appointed to evaluate some of the social programs. Your mission, which you have no choice but to accept, is to reform De- mogrants and Employment Insurance (EI) because they are presently not a§ordable and rife with ine¢ ciencies. One fundamental issue that underlies the reform of demogrants and Employment Insurance (EI) is the conáicting objectives of providing adequate income protection on one hand and providing a more e¢ cient incentive structure on the other hand. Explain the nature of the disincentive e§ects that are involved with demogrant payments and the disincentive e§ects that are involved with EI. Your response should be set in the framework of the labour supply model, which means a discussion of the income e§ect and the substitution e§ects. Support your answer with help of diagrams and at the same time give an intuitive explanation of the economic behavioural mechanisms.

Answer 1