When unemployment is widespread and the wage is above its market clearing level,a cut in employer payroll tax will
A) be largely ineffective.
B) benefit employers and have no effect on workers.
C) increase employment, reduce unemployment, and have little to no effect on wages.
D) drive up wages but have little to no effect on employment and unemployment.

Question

Quizplus · Accepted Answer

When unemployment is widespread and the wage is above its market clearing level, it means that the labor supply is greater than the labor demand, leading to a surplus of labor in the market. In this scenario, a cut in employer payroll tax would decrease the cost of labor for firms, enabling them to increase the number of workers they hire. This would, in turn, increase employment and reduce unemployment. However, since there is a surplus of labor, the increase in employment would not lead to an increase in wages, and hence, the effect on wages would be minimal. Thus, choice C is the correct answer.

When Unemployment Is Widespread and the Wage Is Above Its