Question

Use the labor/leisure model to illustrate the impact of increasing the implicit tax rate t in a TANF program from t-,50 to t-1.00 on the labor supply decision of the following three groups: (a) those people working zero hours; (b) those people who are receiving some ben fits, but who are also working in the market a few hours per week

Answer 1

The labor leisure model is considered to be one of the most practical approaches to the economic studies wherein the economic development of an individual is not only centered around the total utility the individual receives from the income he generates, but the overall utility of the individual is also reassured in line with the total leisure time that the individual is able to utilize. Leisure is considered as a critical variable that determines the overall economic development and well bring of an individual. If an individual earns huge amount of money but does have the leisure time available to spend the money, then the individual is not considered as an economically well-being. In the case of TANF (Temporary Assistance for Needy Families), with the imposition of increased tax base rate, the effect of the assistance has had varied impact. Let us discuss the impact with the help of a graph:

                                            In the above Labor-Leisure graph, Leisure is measured along the X axes and Labor/income is measured along the Y axes. An individual who earns zero hours of work on his own, get the complete benefit from TANF (Temporary Assistance for Needy Families). Here the labor-leisure effect of such an individual is shown by the curve BC. We can see that for an individual, who gets all his income from the Government in the mode of TANF relief, for that individual, the value of capital or saving or money would be least, and he would thereby spend a huge amount of money and maximum of his time in leisure. His leisure would be maximum.

  However, an individual who are receiving some benefit of TANF from the Government and earns some hours of work on his own, gets the partial or limited benefit from TANF (Temporary Assistance for Needy Families). Here the labor-leisure effect of such an individual is shown by the curve AD. We can see that for an individual, who gets part of his income from the Government in the mode of TANF relief and earns some amount of money on his own, for that individual, the value of capital or saving or money would be very high as he is putting his hard work behind them. He would thereby spend a comparatively lesser amount of money and minimum of his time in leisure. His leisure would be minimum. We can see that as the income or labor increases from OC to OD, the Leisure decreases from OB to OA.