Initially, all workers are paid a wage of w1 per hour.

The government taxes the cost of labor by t per hour only in the “covered” sector of the economy.

That is, if the wage workers receive in the covered sector is w2 per hour, firms pay w2 + t per hour.

Show how the wages in the covered and uncovered sectors are determined in the post-tax equilibrium.

Compared to the pre-tax equilibrium, what happens to total employment, L, employment in the covered sector, Lc

, and employment in the uncovered sector, Lu?