1. One way to increase the labor force participation of women is to provide them
ID: 1163048 • Letter: 1
Question
1. One way to increase the labor force participation of women is to provide them with resources for child-care, since they are often the primary caregivers. Consider three plans. In the first, mothers are given a $400 voucher, whether they work or not, that they can use at any child-care facility which will reduce the out of pocket costs for childcare. In the second plan, the government provides a $4 wage subsidy for every hour worked, which is to be used for child-care expenses. In the third plan, the government will give a $400 voucher to be used for childcare expenses, but only if the mother works at least 10 hours a week. Which of these plans will be effective in increasing female LFPR?. Be sure to reference our model of the labor/leisure choice when explaining the impact of these programs.Explanation / Answer
Third plan will be most effective . A lumsum transfer over a certain minimum number of labour hours will not distort the leisure labour trade-off.
A wage $400 vocher means increased income for the workers given that workers work at least 10 hours a week. So in this case substitution effect will force the women's to supply more labour as leisure is now expensive to consume..So with substitution effect labour will supply more labour. Income effect tells us that as you have more income to spend you are well off than before so spend a little more time on leisure. So income effect will force consumer to have more leisure. The final outcome will depend on relative strength of income and substitution effect. If substitution effect is more than income effect then labour supply will increase and vice versa.
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