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Economics Assignment: Youth Employment and Earned Income Tax Credit

1.This question asks that you download data from Statistics Canada’s CANSIM database that is available online. Please find instructions at the end of this assignment about how to access and download the time series data. The questions below relate to the information featured in the chart that you will create in Excel.

This problem looks at the Canadian youth population, aged 15-24. This group includes non-students, full-time students and part-time students. Non-students are people not enrolled in an educational institution. Part-time (p-t) students and full-time (f-t) students are people enrolled part-time and full-time respectively in an educational institution. In general, the employment rate is the number of persons employed expressed as a percentage of the population (15 years of age and over). In this problem, the employment rate for each of the three youth sub-groups is the number employed in that group expressed as a percentage of the population for that group. A related general concept is the labour force participation rate, the number of labour force participants expressed as a percentage of the population (15 years of age and over). The participation rate for each of the three youth sub-groups is the number of labour force participants in that group expressed as a percentage of the population for that group.

a) Copy and paste the chart (that you have created in Excel) in a Word document, print it and include it in your assignment.

b) All three time series (non-students, p-t students, f-t students) display up-and-down volatility over the short-term (i.e. periods of less than a year). What may explain this volatility?

c) Despite this volatility, one can observe a fall in the employment rate trend across all three groups after 2008? What may explain this fall?

d) The difference in average employment rates over this time period between 1) nonstudents and p-t students and 2) f-t students is between 30 and 35 percentage points. What may explain this difference?

2.Consider two individuals with endowments of T= 60 hours (per week) of leisure, nonlabour income of Y, and a wage of \$7.50 per hour. At this wage, assume that workers are constrained by their employers to work 40 hours per week, or not at all.

a. On carefully labelled diagrams, show the equilibrium for a worker for whom 40 hours is the optimum labour supply and a worker who would like to work 50 hours, but still prefers the 40-hour week to not working at all. Compare the marginal rates of substitution for these individuals at 40 hours per week.

b. The average part-time “moonlighting “wage is \$7 per hour, in contrast to \$7.50 wage for full-time workers. By modifying the above model for the individual who prefers to work more than 40 hours a week, provide an explanation for this difference in wage rate

3.The U.S. Earned Income Tax Credit (EITC) has been described as one of the most successful elements of U.S. antipoverty public policy, especially as it directs benefits towards the poor. Low-wage workers receive additional income (through a tax credit) from the federal government, depending on how much they earn each year. Consider these program features that define an individual worker’s eligibility:

i) There is no tax credit if no labour market income is earned.

ii) Phase-in range: the tax credit equals \$0.35 per dollar earned, and peaks at \$3000, when the worker earns \$9000.

iii) Flat range: the tax credit remains at \$3000 until the worker earns around \$16,500.

iv) Phase-out range: the tax credit is phased out gradually, by \$0.15 per dollar earned,

until eliminated completely if the worker earns \$35,500 or more per year.

(a). Assuming the worker does not receive any non-labour market income, graph the budget constraint associated with the EITC for a typical worker earning W per hour.

(b). Analyze how the imposition of the EITC affects hours of labour supplied. Assuming that substitution effects are larger than income effects for the typical lowwage worker, does the credit necessarily increase hours of work for all those who are eligible? Why or why not? Assume non-labour market income is very low (close to zero).

(c). Analyze the impact of the EITC on an individual’s labour force participation decision, assuming that the individual was not working in the absence of the EITC. Assume non-labour market income is very low (close to zero).