Answer to Question #83057 in Microeconomics for Harpreet

Question

1. A wage subsidy has been proposed as the best way to increase the income of the working poor. The subsidy would involve government topping up the hourly wage rate of the individual who has been designated “working poor”. Discuss the possible income and substitution effects associated with a wage subsidy.

Answer 1

As for employees, the amount of leisure is reduced by the substitution effect of increase in the wage. Therefore, leisure time is consumed and the amount spent working increased. Positive substitution effect on labor supply is produced by a higher wage. However, income is affected by higher wage