Question

Suppose that total market demand for labor is ED=20,000 - 200w and total labor supply is ES=600w. Answer questions below (a-e).

(a) What is the market-clearing wage? What is the market equilibrium employment?

(b) If a per unit payroll tax of $10 is imposed on employers, what will be the after-wage paid by employers? What will be the after-tax wage received by workers?

(c) What is the deadweight loss from the tax?

(d) What percent of the tax do employers pay?

(e) In real world U.S. labor markets would you expect employers to pay this much of the payroll tax? Explain

Answer 1

Ed=20000-200w

Es= 600w

a.At equilibrium Es=Ed

20000-200w= 600w

W*= 20000/800= $25

Employment*= 600*25= 15000

b. Tax=$10

Ed'= 20000-200(w+20)= 20000-200w-4000= 16000-200W

Es=600W

New Equilibrium:

16000-200W=600W

W=16000/800=20

Wage received by workers= $20

Wage paid by employer= $20+$10=$30

E**= 600*20= 12000

c. Deadweight loss=0.5*10*(15000-12000)= $15000

d. Tax share paid by employers= ($5/$10)*100= 50%

e. No, In real world employers will not pay 50% tax as supply is more inelastic than demand, so workers bear more burden of tax.

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