Question

Does the United States’ labor supply tend to be more elastic or more inelastic? Explain the competing theories. Which seems more convincing to you? Explain your answer.

Answer 1

In the United States, labor supply tends to be inelastic relative to labor demand, and according to law, payroll taxes are essentially assessed evenly between workers and firms.

As labor supply is relatively more inelastic than labor demand, workers will bear a greater percentage of payroll taxes than employers regardless of how the law stipulates the amount be split. Most estimates suggest that workers in the United States bear about 80 to 85 percent of payroll taxes. Again, tax incidence does not depend on who legally is required to pay the tax, so levying a greater percentage of payroll taxes on firms will not have any real economic effect.