ECON 4531, Labor Economics

Text: Labor Economics, Borjas, 8th edition

Problem 2

Suppose labor supply is given by w = 15 + E and labor demand is given by w = 25 - E where w denotes the hourly wage rate and E denotes hourly employment.

(a) Calculate the equilibrium wage and employment level.

(b) Now suppose that, in addition to the wage, firms have to pay a payroll tax of $2 per hour per worker. Calculate the equilibrium wage and employment level with the payroll tax.

(c) Suppose now that, instead of firms, workers are the ones required to pay the same payroll tax. Calculate the equilibrium wage and employment level with the payroll tax.

(d) How are equilibrium employment and wages you found in parts (b) and (c) related?

(e) How are firms' hiring costs and workers' take-home pay found in parts (b) and (c) related? How would you interpret this result?