Final answer:
A payroll tax on labor earnings will reduce after-tax wages to workers but increase the after-tax cost of labor to firms. If labor supply is highly inelastic, there will be no wage change for workers. The impact on workers can be worse if the tax is levied on them rather than on firms.
Step-by-step explanation:
A payroll tax on labor earnings will reduce after-tax wages to workers but increase the after-tax cost of labor to firms. This is because the tax is typically deducted from workers' paychecks, leading to a decrease in their take-home pay. However, the tax also increases the cost of hiring for firms since they have to pay the tax on top of the workers' wages.
If labor supply is highly inelastic, there will be no wage change for workers in response to the tax. This means that workers will continue working the same number of hours and their wages will remain unaffected.
If the tax is levied on workers rather than on firms, it may be worse for workers. This is because when workers bear the burden of the tax, it directly reduces their take-home pay. On the other hand, if the tax is levied on firms, they may have to bear the burden in the form of decreased profits or increased prices.
If labor supply is highly inelastic, a payroll tax can cause a large decrease in employment. This is because even a small increase in labor costs can discourage firms from hiring, leading to a decrease in employment.