Question

Suppose that under a new law all businesses must pay a tax equal to​ 6% of their sales revenue. Assume that this tax is not passed on to consumers.​ Instead, consumers pay the same prices after the tax is imposed as they did before.

​1.) Use the line drawing tool to show the effect of this change on the labor market. Properly label your new line.

​2.) Use the point drawing tool to identify the new equilibrium real wage and employment. Label this point​ 'E'.

Assuming that the labor supply curve is unchanged, the tax will cause employment to ▼ and the real wage to increase remain constant decrease increase decrease remain constant NS ND N* Labor, N

Answer 1

Assuming that the labor supply curve is unchanged, the tax will cause employment to decrease and the real wages to decrease.

Since the tax is not passed on to consumers, it will all be paid by the firm, and amount received after selling each units will decrease by 6%. Therefore, the marginal product of labor will decrease by 6%. Due to this, labor demand will fall, and the labor demand curve will shift leftward and the labor supply curve will remain same, Which will lead to reduced employment as well as reduced real wages.

Assuming that the labor supply curve is unchanged, the tax will cause employment to decrease and the real wages to decrease. Since the tax is not passed on to consumers, it will all be paid by the firm, and amount received after selling each units will decrease by 6%. Therefore, the marginal product of labor will decrease by 6%. Due to this, labor demand will fall, and the labor demand curve will shift leftward and the labor supply curve will remain same, Which will lead to reduced employment as well as reduced real wages.