Question

Suppose firms in a competitive labor market are required to start providing a mandated benefit that costs $C per unit of employment. The value of the benefit to workers is greater than the cost to firms ($B>$C).

a. Draw a graph showing the initial equilibrium (no mandated benefit), the new equilibrium, the cost per unit of employment firms face at the new equilibrium, and the value of the workers’ compensation at the new equilibrium.

b. Is there a deadweight loss associated with the mandated benefit?

Answer 1

A)

In the above figure initially labour market is in equilibrium is point Q where both the demand curve D0 and supply curve S0 intersect each other. At this equilibrium level, employment level is E0 and wage rates are W0 suppose the government mandates the firm to provide a particular benefits to the employees. And this benefit costs C dollars per workers to the firm, but it causes benefits B per workers, so that benefits occurring to the workers is more than the the cost of the firm $B>$C .

As a result of the increase in cost of the firm demand for labour falls and thus the demand curve shifts downward from D0 to D1. Similarly, in response to the higher benefits the supply of labour increases and the supply curve shifts from S0 to S1. As it is clear from the figure above, the shift in supply curve is more than the shift in demand curve. Both the new demand curve and supply curve cut each other at the point P which is the new equilibrium point at this point the new employment level is E1 and the new wage rate is W1. The employment level has increased, but the wage rate has decreased. The fall of wage rate is more than C, but less than B therefore the mandated benefit is proved beneficial for both the firm and workers

B)

There is no deadweight loss associated with the mandated benefit because there is no fall in employment in contrast to it. The employment has actually increased which has caused additional surplus to the firm.