Employers in a city must pay a specific tax of $t per hour worked by their employees while employers in the suburbs of the city do not have an employment tax.What does a general equilibrium approach predict regarding the wages and employment of both the city and suburban workers if the city decides to substantially reduce their employment tax rate?

Question

Quizplus · Accepted Answer

Reducing the employment tax in the city makes employment there more attractive to employers, likely increasing demand for city workers and thus their wages. This increase in demand for city workers can also draw workers from the suburbs, increasing suburban wages due to reduced labor supply there. Employment in the city increases due to the tax cut making it cheaper to hire, while in the suburbs, employment may decrease as workers move towards the city for better opportunities.

Employers in a City Must Pay a Specific Tax of $T