Suppose that current workers' compensation policy (A) provides employees injured on the job a payment of $X each year whether they work or not. Suppose the government were to implement a new program (B) in which those who did not work at all got ½ $X per year but those who did work got ½ $X plus workers' compensation of 50 cents for every hour worked.So, in other words, the constraint under policy A is the fixed payment plus the wage rate [($X) + W], and under policy B it is [.5($X) + 1.5W].
Graphically depict the wage constraint for (1) no policy, (2) policy A, and (3) policy B.
What impact does policy A have on labor supply compared to no policy at all?
What would be the change in work incentives associated with policy B compared to policy A?