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True or False? Draw a graph to support your answer. When unions play a decisive role...

True or False? Draw a graph to support your answer. When unions play a decisive role in the labor market, the dead-weight loss of payroll tax is high, and the revenue generated by the tax is small.

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Answer #1

The statement is false.

When due to the decisive role of unions, wage rate is increased, the amount of payroll taxes also Increases, but it adds to more revenue to govt and comparatively lesser economic loss to society ,that is deadweight loss is lesser.

The main reason is inelasticity of labour supply.

Numerical Example to justify -------

Suppose, labour demand and labour supply ( inelastic)determine the Equilibrium wage rate at $6 & Quantity of labor is 30 workers.

After the pay roll taxes($1), the Supply curve shifts leftward, determining wage rate $6•4 and labour Quantity at 27 workers

See the graph------

Calculating Tax Revenue of govt----

27×(1$)=$27

Calculating Dead weight loss ( DWL)----

1/2(30-27)(6•4--5•4)=$1•5

As we find that DWL<pay roll tax revenue

Hence, it is proved that given Statement is false.

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