Hermione, without a job or job prospects, has been on social assistance for the past four months. Social assistance pays a basic benefit of $600 a month with a benefit reduction rate of 75 percent for earned income. Her welfare benefit is given as B = 600 - 0.75E, where E represents monthly earnings.
1. Hermione has just been offered a part-time job working 5 hours a day, 5 days a week, earning an hourly wage of $11. Sketch a budget constraint for Hermione given the social assistance scheme in place and the wage rate available for part time work. How much income would she earn if she accepted the job? Would Hermione still be on social assistance if she took the job?
2. Illustrate these two possibilities:
1. Hermione is better off (i.e., is on a higher indifference curve) when she takes the job, and
2. Hermione is better off not taking the job and remaining on social assistance.
3. Suppose that the province decides to exempt the first $400 in earned income so that now the basic welfare entitlement is reduced by $0.75 for every dollar of earned income in excess of $400. Draw a new diagram to illustrate how this exemption affects Hermione's budget constraint. Suppose that before the policy change Hermoine decided not to take the job. Might Hermione have made a different decision in regard to accepting the part-time job if the new policy had been in place? Explain.
4. Suppose that Hermione is actually a single parent with one child under the age of six. Discuss how the requirement of daycare can influence Hermione's decision to take the part-time job, given (i) the original welfare policy and (ii) the reformed welfare policy is in place? What other policy changes could help address the problems that Hermione faces?