Question

Show that a larger portion of the Social Security payroll tax will be borne by the worker the more inelastic the labor supply curve is. How might large firm decision making affect the elasticity of labor supply such that large firms face an inelastic supply of labor?

Answer 1

United States social security payroll taxes are paid half by the employer and half by the employee.However it is also believed that the workers bear the burden of the tax because the employers pass the burden in the form of lower wages.The tax incidence will fall on the worker .Sometimes the incidence falls on the employer too because the price elasticity of demand and supply determine on whom the incidence of tax will fall.

Elasticity of labor supply measures how labor supply responds to change in wage rate in a given time period . This is affected by the specific skills and educational qualification.Where jobs require specific skills and training labor supply will be inelastic. The level of wage setting power depends on the value of elasticity of labor supply curve to the firm.Large firms require skilled labor and so supply will be inelastic.