Evaluating a Wage-Based Policy
A government proposes a policy to increase hourly wages for a specific group of workers. A key objective is to incentivize these individuals to work more hours. An economic advisor cautions that, for some individuals, this wage increase might actually cause them to work fewer hours. Critically evaluate the advisor's caution. Explain the economic reasoning that could lead to such a counterintuitive outcome. In your answer, describe the two opposing effects of a wage change on an individual's choice between work and free time, and identify the conditions under which one effect might dominate the other, leading to a reduction in hours worked.
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Economy
CORE Econ
Social Science
Empirical Science
Economics
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
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An individual's preferences for daily consumption (c) and hours of free time (t) are described by the utility function u(t, c) = c + 20√t. This person's only source of income is their wage from working. If their hourly wage rate experiences a significant increase, what will be the resulting change in their desired number of hours of free time?
Evaluating a Wage-Based Policy
Contrasting Responses to a Wage Increase
Divergent Labor Supply Responses
The way an individual adjusts their work hours in response to a wage change is determined by their unique preferences for consumption and free time. Match each description of an individual's preferences with the corresponding change in their desired work hours after a significant wage increase.
For any individual whose preferences for consumption and free time can be described by a well-behaved utility function, an increase in their hourly wage will always lead them to choose fewer hours of free time.
Predicting Labor Supply Responses
Analyzing Labor Supply Behavior
Two individuals, Alex and Blair, have identical jobs, earn the same hourly wage, and possess the same amount of non-labor income. After both receive an identical, significant wage increase, Alex decides to work more hours, while Blair decides to work fewer hours. What can be concluded from this observation?
Designing Preferences for a Labor Policy Goal