1. Canada provided a 75% wage subsidy to employers who were hit by the mandated economic...

1. Canada provided a 75% wage subsidy to employers who were hit by the mandated economic lockdown under current healthcare pandemic. what happens when the wage subsidy rate falls using simple market model

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Expert Solution

Wage subsidy:

These are normally given as an incentive to people to work more , as these are being paid more for work than normal, owing to pandemic it has been a commonly strategy adopted by states to increase the welfare among public ,to support their living.

Changes in subsidies :

As shown above

Initial equilibrium is at E ,wage at W i.e. $10 and quantity is Q
Now the SUBSIDY WEDGE - is the range in which the government can increase or decrease the subsidy i.e. in our case is taken as of $4
Now for subsidies if at upper wedge at $12 or at lower $8 that is FALL IN RATE OF SUBSIDY the quantity demanded will be same i.e. more than before at Q* and wage as W1 or W* respectively.
Therefore ,if wage subsidy falls below equibirium also the quantity demanded will be high ,owing to subsidy wedge
However in case of setting minimum wage at $ 12 for labor protection ,the MINIMUM WAGE PHILOSOPHY WILL DECREASE THE QUANTITY DEMANDED TO Q1 and wage at W1.

Conclusion :

With above analyses subsidies tend to be more positively effective than minimum level setting and former is so supported by economists.

And will fall in subsidy the wage rate might fall but without changing quantity demanded

Kindly please rate the answer and do feel free to ask in case of doubts

Rahul Sunny answered 1 year ago

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