Question

Employment insurance is a system that provides insurance benefit to workers who involuntarily lose their jobs. Suppose that the current eligibility requirement for employment insurance is workers who have worked for 10 weeks or more per year. Assume that there is 52 weeks in a year and the wage rate is $500 per week, and maximum benefit payment duration is 20 weeks of per year. The benefit amount is 50% of wage paid for 20 weeks.

a.    Construct the corresponding income-leisure constraint.

b.    Compute the level of income if this individual is to work 22 weeks a year. What is amount of earned income and what is the amount of welfare benefit?

c.     Compute the level of income if this individual is to work 42 weeks a year. What is amount of earned income and what is the amount of welfare benefit?

Answer 1

1. Corresponding income leisure constraints :

Income leisure constraints is about the opportunity cost which may be sacrificed by labour in order to have extra leisure. Here we calculate this in terms of weeks. Here it is assumed that 20 weeks are of leisure as we know that for 20 weeks only we get benefits if we unemployed for more than or equal to 10 weeks.

We also know that labour is always working to get higher wages. Means higher the wages, higher their working hours in week. But at a certain level when they think that income earned is sufficient then they start again to increase their leisure time. In simple terms if labour work for 52 weeks then money supply rate is $500 otherwise nothing. Here the figure shows that if money supply rate on y axis increasing then leisure hours may reduced from 20 to 15 and then 10. However if he loss the job for 20 weeks then in that case also he is paid $250 for equivalent to 10 weeks.

2. If labour works for 22 weeks a year and if we consider the remaining part of year 52-22=30 weeks he is unemployed then he will covered under the insurance and get $250 .

Earned income for 22 weeks = Total week worked * wage rate per week

= 22*500=$11000.

Welfare benefits for 20 weeks only not 30 weeks :

20 weeks *wage rate (50% of $500)

= 20*250=$5000

3. If labour is working for 42 weeks in a year. And for remaining period if he is unemployed that is 52-42=10weeks,then to be he is eligible for the benefit as the limit is 10 weeks or more.

Earned income =Total weeks worked *wage rate per week

=42 * 500=$21000.

Welfare benefit for 10 weeks is also :

Benefit = 10 weeks * equivalent wage rate (50% of $500)

= 10*250=$2500.