A tax on labor causes a larger drop in equilibrium wages when:

Question

Quizplus · Accepted Answer

When the labor supply curve is steeper (less elastic), the tax burden falls more heavily on workers in the form of lower wages. This is because there are fewer substitutes for labor, and workers are less able to switch to other types of jobs or industries. In contrast, when the labor supply curve is flatter (more elastic), workers have more options and can more easily shift to other jobs, which means that the burden of the tax falls more heavily on employers who must pay more to attract workers. The steepness of the labor demand curve is not relevant to the size of the drop in equilibrium wages.

A Tax on Labor Causes a Larger Drop in Equilibrium