4-3 Policy Application: Payroll Taxes and Subsidies 4-4 Policy Application: Payroll Taxes versus Mandated Benefits

The Impact of a Payroll Tax Assessed on Firms B Dollars w w0w0 S D0D0 D1D1 w1w1 w 0  1 E1E1 E0E0 A A payroll tax of $1 assessed on employers shifts down the demand curve (from D 0 to D 1 ). The payroll tax cuts the wage that workers receive from W 0 to W 1, and increases the cost of hiring a worker from W 0 to W 1 +1.

The Impact of a Payroll Tax Assessed on Workers A payroll tax assessed on workers shifts the supply curve to the left (from S 0 to S 1 ). The payroll tax has the same impact on the equilibrium wage and employment regardless of who it is assessed on. Dollars w2w2 w0w0 S0S0 D0D0 D1D0D1D0 E2E2 E0E0 Employment S1S1 w w 2  1 A C

The Impact of a Payroll Tax Assessed on Firms with Inelastic Supply A payroll tax assessed on the firm is shifted completely to workers when the labor supply curve is perfectly inelastic. The wage is initially W 0. The $1 payroll tax shifts the demand curve to D 1, and the wage falls to W 0 – 1. Dollars w0w0 D0D0 S D1D1 E0E0 A B Employment w 0 – 1

The Impact of an Employment Subsidy w1w1 S D1D1 D0D0 w0w0 E0E0 E1E1 B A Employment w w 1 – 1

The Impact of a Mandated Benefit Dollars w0w0 S1S1 D0D0 D1D1 E1E1 E0E0 P Q Employment S0S0 w1w1 w0  Cw0  C E*E* w*w* w * + B R Dollars w0w0 S1S1 D0D0 D1D1 E0E0 P Employment S0S0 w*w* R w * + C (a) Cost of mandate exceeds worker’s valuation (b) Cost of mandate equals worker’s valuation