Question 6

[Payroll tax is like a sales tax but applies to workers' wages. Many economists have called the state payroll tax a "tax on employment".]

1. [Suppose that the equilibrium wage is given by $15 per hour. The government introduces a payroll tax on employment of $3 per hour that must be paid to the government by employers. Show in a diagram, how this will lead to a reduction in employment (quantity of labour employed in hours). Explain who will bear the cost of the payroll tax? (Hint: show wages on Y axis and quantity of labour in hours on X axis in your labour demand and supply model).
2. [Now, suppose that before the government introduces the payroll tax, there is a minimum wage set at $22 per hour. Explain in 2-3 sentences whether this wage floor is binding. Also, explain in the effect this price floor on employment and unemployment, (i.e., quantity of labour employed in hours). No diagrams needed]
3. [This minimum wage law stays in place when the payroll tax is introduced so that employers must pay workers at least $22 per hour and then pay an extra $3 per hour to the government in tax. Explain how the payroll tax will affect the level of unemployment. (Hint: unemployment here refers to excess supply of labour). (3 marks)]

Answer