The elasticity of the supply of labor in part determines who bears the burden of Social Security

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The elasticity of the supply of labor in part determines who bears the burden of Social Security taxes. Those taxes are typically levied in matching 6.2 percent shares on workers’ wages and wages paid out by employers.

Economists treat the two shares as one tax and then consider two cases. In competitive labor markets, the supply of labor is taken to be totally inelastic. In noncompetitive labor markets, workers’ bargaining power matches that of employers and the supply and demand curves for labor have similar elasticities. Who bears the burden of Social Security taxes in each case? Illustrate your answer with two labor market diagrams. (Hint: Empirical evidence indicates that in the noncompetitive case, the employer’s share of Social Security taxes is passed on to consumers in the form of higher prices.) (Radical)

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Microeconomics

ISBN: 9781260507140

11th Edition

Authors: David Colander

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