Question

In response to growing concern about a ‘wage gap’ between skilled and unskilled workers, candidate Hiram Bloviate has offered two alternative proposals designed to close the wage gap by making low wage workers more attractive to employers.

 • The first is to remove the cap on the amount of worker wages subject to the employer paid portion of the Social Security tax (the current cap is around $100,000), as well as eliminating the deductibility of capital expenditures (that is, employers can no longer reduce their business income tax liability by purchasing capital).

 • The second is to exempt the first $50,000 of employee wages from the employer paid Social Security tax. 

A. What will be the effects of the two proposals? Analyze them separately, using the appropriate course concepts. 

B. Which proposal is more likely to achieve Candidate Bloviate’s objective? Why?

Answer 1

Immigrants at least implicitly compare the wages they can expect in the United States with those they can expect in their place of origin. Thus, if the American unskilled wage rises relative to the skilled wage, the United States should experience a rise in unskilled relative to skilled immigration.

Further, a declining gap between the educated and the less-educated would serve to make the American distribution of earnings more equal. Skilled workers tend to come from countries with more equal earnings distributions than found in the United States (many European countries, for example), while unskilled workers tend to come from countries (often developing countries) with less equal earnings distributions. When the American
earnings distribution becomes more equal, there will be reduced incentives for skilled immigration from Europe, say, and more incentives for unskilled immigration from countries with less-equal distributions