Question

Suppose the government mandates that employers provide health insurance that costs $t per unit of labor. Employees value the insurance per unit of labor at $v. How does the insurance mandate affect the equilibrium wage and labor if $v=$0? If $0<$v<$t? If $v=$t?

Answer 1

So, as we know that the equilibrium wage and employment will be determined by the intersection of “labor demand” and “labor supply”, let’s assume that “E1” be the initial equilibrium and “W1” and “L1” be the initial wage and employment. Now, the employers provide health insurance that cost “$t” per units of labor and employees value the insurance per unit of labor at “$v”, => here the labor demand will shift down wards by “t” and labor supply curve will also shift downward by “v”.

So, if “$t > 0” and “$v = 0”.

So, under this situation the demand for labor will shift downward by “t” but the supply of labor will remain same as it is, => the new equilibrium is given by “E2” correspond a new wage and employment combination “W2 < W1” and “L2 < L1”. So, under this situation both “W” and “L” decreases.

Now, if “0 < $v < $t”.

So, under this situation the demand for labor will shift downward by “t” but the supply of labor will shift downward by “v”, => the new equilibrium is given by “E2” correspond a new wage and employment combination “W2 < W1” and “L2 < L1”. So, under this situation both “W” and “L” decreases.

Similarly, if “0 < $v = $t”.

So, under this situation the “demand for labor” and “supply of labor” both will shift downward by “t = v”, => the new equilibrium is given by “E2” correspond a new wage and employment combination “W2 < W1” and “L2 = L1”. So, under this situation the equilibrium wage decreases but employment remains as before.