Question

Consider the case where the demand curve and supply curve for unskilled labor are given in the following table:

(1) Wage Rate (/hour)	(2) Wage Rate2 (/hour) (employer pays tax)	(3) Q of Labour Demanded (hrs/week)	(4) Wage Rate2 (/hour)	(5) Q of Labour Supplied (hrs/week)
8.5	10	1000		1900
8	9.5	1200		1800
7.5	9	1400		1700
7	8.5	1600		1600
6.5	8	1800		1500
6	7.5	2000		1400
5.5	7	2200		1300

Employment insurance premium is paid in full by the workers instead of the employers. Fill in the empty column (4) & ignore column (2) above to assist you in answering the following questions:

1. What is the new equilibrium wage rate?
2. What is the quantity of labor hours hired at the new wage rate?

3. Workers absorb how much of this tax?
4. Employers absorb how much of this tax? Does it matter who pays the tax?

Answer 1

Answer : 1) The equilibrium condition occur when demand = supply. In the given table the labor demand = labor supply = 1600 at wager rate $7/hour. Hence the equilibrium wage rate is $7/hour.

2) In the given table the labor demand = labor supply = 1600. Hence at equilibrium 1600 labor hours are hired.

3) After $1.50/hour tax set the columns of wage rate becomes :

(1) Wage Rate (/hour)	(4) Wage Rate2 (/hour)
8.5	10
8	9.5
7.5	9
7	8.5
6.5	8
6	7.5
5.5	7

As demand = supply = 1600 at $8.50/hour after tax set, hence the new equilibrium wage rate is $8.50/hour.

4) As at new wage rate $8.50/hour the Q of labor demand is 1600, hence 1600 labor hours are hired at new wage rate.