Question

Consider the supply and demand curves of a labor market.

(a) Argue graphically when a reduction in a payroll tax could reduce unemployment

(b) Suppose in a labor market that the wages of another, similar labor market increase. How does this shift the labor supply and demand curves? What happens to wage and employment?

(c) Suppose there is a boom in a particular industry and at the same time, wages for the same types of workers in a surrounding area are extremely high. How do the supply and demand curves shift? What happens to wage? What about employment?

Answer 1

1.When payroll tax is reduced,the disposable income of the workers rise.As a result,more people would be willing to work.Supply of labour rises.Supply curve shifts to the right.Wage rate falls and employment rises.

2.When wage rate offered for the similar labour is higher in a different market,the workers migrate to the different market.This causes a fall in the supply of labour in this particular market.Supply curve shifts to the left.Wage rate rises but employment falls.

3.When there is a boom in the industry,the demand for labour rises to raise the level of production.However the supply falls because worker migrate to the other market.Wage rate rises but employment remains the same.