How might certain policies increase or decrease total wages…
How might certain policies increase or decrease total wages paid to workes in a local labor market? Let’s consider the following model of supply and demand. The relationship between the quantity of workers supplied and the wage is qS = 3w, while the relationship between the quantity of workers demanded and the wage is qD = 100 – 2w. In the market equilibrium, the wage paid is w* = $[w], and [q] workers are hired. Total wages paid here are $[tw]. Let’s first consider what happens to total wages when a minimum wage of $25 is imposed. Here, [q25] workers are hired and total wages paid are $[tw25]. When a minimum wage of $30 is imposed, [q30] workers are hired and total wages paid are $[tw30]. Finally, when a minimum wage of $35 is imposed, [q35] workers are hired and total wages paid are $[tw35]. Now let’s model a payroll tax. Firms must pay the government $5 per worker hired — this does in a labor market exactly what an excise tax does in a regular market for goods. While workers receive a wage of wS (remember, workers are the suppliers in a labor market), firms must pay more: wD = wS + 5. Our new equilibrium condition is that 3wS = 100 – 2wD. Substitute the identity for wD in terms of wS into the equilibrium condition (making sure to distribute the -2 correctly) and solve for wS = $[ws]. This means that we have wD = $[wd], according to our equation. With the payroll tax, [qpt] workers are hired. If the government receives $5 per worker hired, let’s now imagine that they send all of this revenue back to workers. Here, we have total wages paid plus government revenue equal to $[twgr].
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