Question

Suppose that Congress passes a law requiring employers to provide employees some benefit (such as healthcare) that raises the cost of an employee by $3 per hour. Assume that firms were not providing such benefits prior to the legislation On the following graph, use the green line (triangle symbol) to show the effect this employer mandate has on the demand for labor 20 Demand Supply New Demand 16 14 12 10 New Supply Equilibrium Before Law Equilibrium After Law 0 1 23 4 5 678 910 Quantity of Labor (Thousands) Suppose employees place a value on this benefit exactly equal to its cost

Answer 1

Before the law, the labor market is in equilibrium at point E, where the demand curve Di supply curve Si intersect. The equilibrium wage level is $10 per hour and equilibrium level of employment is 5000 units The following figure shows the market for labor: 20 Demand Supply S2 12 Et 10 D2 Di 0 1234567 89 Quantty of Labor (Thousands) When the cost of employee rises by $3 per hour, the demand for labor decreases due to higher cost of hiring. This results in leftward shift of the labor demand curve to D2 as shown in the above figure When the benefit of employer increases, the supply of labor increases. This results in rightward shift of the labor supply curve from Si to S2. as shown in the above figure After the law is implemented, the market is inn equilibrium at E2. The equilibrium wage level is $6 per hour and equilibrium level of employment is 5000 units After the law is implemented, the equilibrium wage level has decreased. So, the employees are worse off. The correct answer is False

If the market wage is $2 above the minimum wage, it means minimum wage is $8. $6 per In this case, employer mandate will decrease the equilibrium wage rate from $10 to hour is binding. So, the wage rate with the employer mandate will be S8 and the employment decreases and unemployment increases Employees are better off than before the mandate benefit The equilibrium quantity of labor will decrease. The supply curve of labor shifts remain unchanged. Employers are worse off than before the mandate benefit The wage rate will decline by less than $3 because the wage rate with the employer mandate will be S8. Hence, option E applies here.