Documente Academic
Documente Profesional
Documente Cultură
Laura Salisbury
Fall 2013
Example:
N D = 25 3W
N S = 5 + 2W
What is equilibrium wage and employment?
Set 25 3W = 5 + 2W
W = 4 and N = 13
3
Decline in equilibrium wages caused by payroll tax: 5T.
Less than T
Incidence of tax: What fraction of tax is paid by employers? What
fraction is paid by workers?
Workers:
Before tax: workers received W0 = 4
After tax: workers receive W1 = W0 35 T
Amount workers receive falls by 35 T .
Employers:
Before tax: employers paid W0 = 4
After tax: employers pay W1 + T = W0 35 T + T = W0 + 52 T
Amount employers pay increases by 25 T
Workers pay 3/5 of the tax, employers pay 2/5 of the tax
Example:
Labour demand: N D = 20 2W
Labour supply: N S = 8 + W
Payroll tax of $3 per unit of labour hired.
What are wages without the payroll tax? What are wages with the
payroll tax? How much do equilibrium taxes fall as a result of the
payroll tax? What is the incidence of the tax?
Implications:
Just like competitive firm, monopsonist will choose wage at which
marginal revenue product of labour equals marginal cost of labour.
This optimal wage will be lower than equilibrium wage in competitive
labour market.
Monopsony will hire fewer workers than competitive labour market.
See graph for proof
Minimum wage:
Price floor for labour
Illegal to pay workers less than minimum wage
Varies by province
Highest: Nunavut ($11 per hour)
Lowest: Alberta ($9.95 per hour)
Some workers under federal jurisdiction
Define:
Nc = labour demanded/supplied without minimum wage
Nm = labour demanded under minimum wage
Ns = labour supplied under minimum wage
Unemployment under minimum wage = Ns Nm
BUT: decrease in employment only Nc Nm .
Minimum wage decreases labour demanded but also increases labour
supplied
Size of employment reduction depends on elasticity of labour demand.
Intuition:
Because the firm often doesnt have to raise wages in order to attract
more labour when it is paying minimum wage, increasing employment
is less costly at the margin when there is a minimum wage.
If increasing employment is less costly, firm is more likely to do it.
Note: for minimum wage to increase employment, it must be between
W0 and VMP0
Findings:
No employment reduction from minimum wage increase.
If anything, employment increased.
Why?
Corresponding reduction in non-wage benefits?
No effect on free meals to employees
Wage increase passed on to consumers through increased price of fast
food?
Mixed evidence
Interpretation?
Difficult to explain findings with standard competitive model of
labour market.
Monopsony?
Fast food restaurants are not sole employers in labour market
Possible that they are supply-constrained, although authors do not
find much evidence that this matter.