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In: Economics

A wage subsidy for low paid workers is proposed. Every low paid worker will get a...

A wage subsidy for low paid workers is proposed. Every low paid worker will get a $5 additional subsidy for every hour worked. The supply of low plaid workers is more elastic than the demand. Who gains more from this subsidy, workers or employers? Draw a graph and explain.

Solutions

Expert Solution

In following graph, wage rate (P) and quantity of labor (employment, Q) are measured vertically and horizontally respectively. D0 and S0 are initial demand and supply curves of labor, intersecting at point A with initial wage rate P0 and initial quantity of labor (employment) Q0. Since supply is more elastic than demand, S0 is flatter than D0.

After a subsidy is imposed, effective wage received by workers increases, therefore labor supply increases, shifting S0 rightward to S1, intersecting D0 at point B. Wage paid by firms decreases to P2 and wage received by workers increases to P1, while unit subsidy is (P1 - P2). Employment increases to Q1.

Share of subsidy received by workers = P1 - P0

Share of subsidy received by firms = P0 - P2

Since (P0 - P2) > (P1 - P0), firms (employers) gain more from the subsidy.

Rahul Sunny answered 2 years ago
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