Currently, the unemployment insurance system in the United States is funded by

a tax on employers. Suppose the government is concerned about the effect of this

tax on firm profits and decides to eliminate the tax.

a) Using a supply and demand graph to illustrate how the elimination of this

tax will affect the amount that firms pay for workers, the amount workers

receive from firms and the equilibrium employment level.

b) On your graph, show how much tax revenue the government will forego by

eliminating this tax. (Reminder that tax revenue is total hours worked times per-

hour taxes.)

c) In what sense are workers made better off by the elimination of the tax?

d) What additional pieces of information would you need to establish whether

workers or firms are the primary beneficiaries of the elimination of this tax?