Question

Suppose the worker is receiving the unemployment payment EI per day if she is unemployed. If she does get employed, she receives wage rate w but no unemployment payments. In an income-leisure diagram, show how you would figure out this worker's (who is eligible for EI) reservation wage. Explain your diagram.

Answer 1

Unemployment Payment:- Unemployment is a situation where someone in working age is not able to get a job but want to be in full time employment. Unemployment Payment are those benefits which are made by authorized bodies to unemployed people. In US, benefits are funded by a government insurance system for individual citizen.

Wage Rate:- Wage Rate means the amount paid to a worker per unit of time.

Income-Leisure Diagram:- Indifference curve show the relationship between leisure and income.

Diagram 1

The wage-rate measures the price that the worker places on leisure time. As wage rate grows, the price of leisure increase. There are two effects work substitution effect and and income effect.

The diagram show the work-leisure decision that leads to the backward-bending supply of labour. Income effects can determines the people’s income.

The worker is receiving the unemployment payment ‘EI’ per day if she is unemployed. If she does get employed, she receives wage rate ‘w’ but no employment payments. When she gets higher wage-rate, she chooses to prefer work rather than unemployment.