Question

Some time ago the city of Chicago imposed a new per-worker employment tax on employers to help pay for city services. A city alderman, asserting that the city lawyers drafted the law so that it taxed employers, not workers, said ``The City of Chicago will never tax the working man." Show the consequences of this tax on the local labor market using diagrams. That is, show 1. The effects of the tax on equilibrium wage and employment. 2. The effects of the tax on the effective wages received by workers and paid by firms. 3. The tax incidence or burden to workers and firms. Then, based on your diagram, comment on the alderman's statement.

Answer 1

Alderman's statement is not true.

Step-by-step explanation:

Since tax increases the price/cost of hiring new workers by the employers, higher prices decrease labour demand. Regardless on whom the tax has been imposed, it will be shared by workers and employers both. How much of the burden will be determined by the elasticity of supply and demand for the labour.

Only if either demand or supply was either completely elastic or inelastic will the tax burden fall entirely on either employer or worker. Between these 2 extremes, tax incidence varies continuously from a perfectly inelastic supply or perfectly elastic demand, where the workes assumes the entire burden of the tax to the perfectly elastic supply or perfectly inelastic demand where the employers bear the entire burden.

Hence alderman's statement is not true.