Hello. This is Labor of Economics. A December 2007 issue of The Economist contained the following...

Hello. This is Labor of Economics. A

December 2007 issue of The Economist contained the following quote in an article about Germany: " The goverment has just chopped the payroll tax that finances unemployment insurance , which should encourage employment. " Comment on this statement on this statement, using economic theory

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Expert Solution

If there are payroll taxes in play, what happens is that the labor becomes more expensive for the employers as result of which more labour would be substituted with that of capital due to substitution effect on the whole so that their total cost doesn't increase all in all. That is the reason if payroll taxes are reduced, then the labour cost for employers reduce as a result of which they can employ more amount of labour so that the employment level increase all in all. Here the main economic concept taken into account is the substitution effect where it is assumed that labour and capital can be substituted to each other.

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Rahul Sunny answered 1 year ago

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