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[Payroll tax is like a sales tax but applies to workers' wages....

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# [Payroll tax is like a sales tax but applies to workers' wages....

[Payroll tax is like a sales tax but applies to workers' wages. Many economists have called the state payroll tax a "tax on employment".]

1. [Suppose that the equilibrium wage is given by \$18 per hour. The government introduces a payroll tax on employment of \$4 per hour that must be paid to the government by employers. Show in a diagram, how this will lead to a reduction in employment (quantity of labour employed in hours). Explain in 100 or less words who will bear the cost of the payroll tax? (Hint: show wages on Y axis and quantity of labour in hours on X axis in your labour demand and supply model).
2. [Now, suppose that before the government introduces the payroll tax, there is a minimum wage set at \$22 per hour. Explian why this wage floor is binding.  Also, explain the effect of this price floor on employment and unemployment. (i.e., quantity of labour employed in hours. No diagrams needed.

[This minimum wage law stays in place when the payroll tax is introduced so that employers must pay workers at least \$22 per hour and then pay an extra \$4 per hour to the government in tax.

1. [What is the effect of this payroll tax (in addition to minimum wages) on quantity of labour demanded?
2. [Explain in 100 or less words how will the payroll tax affect the level of unemployment?       (Hint: unemployment here refers to excess supply of labour).]

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Answered by YobVelasco12 on coursehero.com
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