Question 3 Labor Taxes The government decides to introduce labor taxes. Assume that o = 0.5

Assignment 3 -...t Equilibrium.pdf Labor Economics - Labor Marker Equilibrium Consider the model of labor market equilibrium discussed in class. As- snme that jobs have all the same S hours/rlay shift, so labor supply choices happen only at tho extensive margin, That is, workers only need to decide whether to work or not. Also a.ssmne that the product produced in this la- bor market is priced ot the, international markets which makes the demand for the, final good infinitely elastic Thus, changes in the labor market. will not affect the price Of the good being produced. The number of workers willing to supply labor evolves according to the following labor supply function: Where Ls is the measure of workers willing to supply labor, w is the wage rate, and as is the labor supply elasticity. In the other side Of the market, firms face the following production tech- no logy: where '1 measures the p10ductivity, Ld is tho number of workers tho firm is employing, and y is the total number of units of output that is produced. Firms maximize profits, which are the difference between revenues and costs: Profit = Revenues Costs 11 = - where II is the profit, u.' is the wage rate, and pg is the price Of the product produced in this labor Inarket. This technology of production implies that marginal rewnucs arc given by Marginal Rcvcnoc Firms hiring decisions arc characterized by the following rule: Continue to increase hiring up to thc point that the increase (marginal) in revenue brought by a worker is just high enough to cover his/her costs. In the absence Question 3 Labor Taxes The government decides to introduce labor taxes. Assume that a, = 0.5 and ad = 2. a) Assume that the taxe is paid by the firms, not the employees. Does the labor supply schedule shift once the policy is introduced? If so, by how much ? b) Continue assuming that the tax is paid by the firms. Does the labor demand schedule shift once the policy is introduced? If so, by how much? c) How does the tax affect equilibium wages in this labor market? d) Does the tax changes employment levels? By how much? e) How much of the tax burden is borne by the workers? What is the mechanism through which part of the costs are shifted from the firms to workers? h) Draw the graph of the log excess of demand equation (log Ld log Ls) before and after the tax is introduced. Make sure you label the axis, the magnitude of the slope, you identify the height of the intercept, and the exact point that it reaches zero in both cases. Question 4 Mandated Benefits The government decides to force firms to provide all of their employees with health insurance. The current equilibrium wage rate that prevails in the market is 80 dollars a day. The cost Of health insurance is 20 dollars per worker per day. The worker's valuation, or willigness to pay for the health insurance is 15 dollars per day-I a) Find the change in labor supply associated with this policy. b) Find the change in labor demand iLssoc:iated With this policy. c) Find the change the equilibrium wage associated with this policy. d) Find the change in the cost per worker associated with this policy. e) Find the change in the worker's total compensation (wage and fringe benefits) associated with this policy. f) Now, assume that = 0. Who bears the costs of providing the health insurance? g) Now, instead, assume that ad = 0. Who bears the cost of providing health insurance? Question Review Questions a) What is the condition that characterizes the labor market equilibrium? b) If wages are taxed at a rate of T equal to 10%, how does it change the equation that characterizes the firm's employment decision? c) The number of workers that are willing to supply labor increases by 5% if the worker's wage increases by 15%- What is the value of Che labor supply elasticity, that is consistent with this relationship?