1
$\begingroup$

In the textbook "Borjas, G.J. Labor economics." (Boston, Mass.; London: Irwin/McGraw-Hill, 2009) fifth edition [ISBN 9780070172708]. Below is a screenshot of the example of payroll tax of 1 dollar on the employer. And the labor demand curve shifts down by 1. What happens if the tax is not 1 dollar but, say, 10% of wage? I know that the labor demand curve will shift downward. But does it also rotates in a way that it has a steeper slope? enter image description here

$\endgroup$
3
$\begingroup$

Your guess that somewhat is happening with the slope was a good one. The slope will indeed change. If you want to draw that new Demand line ($D_1$) it has to start at the exact same point of the old demand line (if wages are zero the percantage tax will be zero too). The correct intersection with the Y-Axis would be: $(1-t) W_0$ (this simply means one minus the tax rate ($t$) times the old intersection point ($W_0$). I also made a little graph: enter image description here

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.