Description
Its February 2016 and Pete is a single 27 years’ old living and working in England. Pete works a given
number of hours per week earning £5.3 per hour. In addition to his labour income, Pete receives
Working Tax Credits (WTC). Both payments are made on a weekly basis. Pete and his employer have a
1-year contract that ends the 31st March 2016. If he wants to continue working for his employer he can
sign a new 1-year contract, starting 1st April 2016. Like in is previous contract, Pete is free to choose in
advance how many hours to work each week, but the number of hours has to be the same every week
for the duration of the contract. If he wishes to, he can opt-out of maximum working time regulations.
Unfortunately, the wage rate: £5.3 per hour, is non-negotiable and he is unable to find a better job
offer elsewhere.
Use the standard labour supply model to investigate how changes in the WTC that came into effect the
1st April 2016, i.e. (1) a cut in the income threshold from £6,420 to £3,850 a year and (2) an increase in
the withdrawal rate from 41% to 48%, would affect the number of hours Pete would choose to work
2
under the new contract compared with his labour supply before the policy change (i.e. fiscal year
2016/17 vs. 2015/16).
