ABSTRACT
Equation (4) states that the effects of shifts in the budget constraint on labor supply can be decomposed into a substitution effect, which depends on the change in the net wage rate Aw, and an income effect, which depends on the change in disposable income evaluated at initial hours of work, A Yd(Hp). For a person placed on an experimental N I T program. Aw is equal to the gross wage rate times the difference between the preexperimental and experimental tax rates,12 and A Yd( H p) is equal to the payment the person would receive if initial labor supply were maintained. Referring again to Figure 1, consider a person below the break-even level who is in equilibrium at point Z before the imposition of an N I T program. The change in the quantity of leisure demanded is comprised of a substitution effect ( L% - L p) holding disposable income constant at initial labor supply, and an income effect (L e - L s) holding relative prices (i.e., the
where A Yd{ Hp) is the change in disposable income of an individual, holding constant his or her initial labor supply H p.
