Suppose that the government imposes a lumpsum tax on goods p

Suppose that the government imposes a lumpsum tax on goods produced by a irm. Determine the efect of this tax on the irm’s demand for labor.

Solution

A tax on labor can get to shift the demand curve downward reducing the wages and also employment. However it also depends on the elasticity of demand where if the labor supply is inelastic, the burden falls on the workers and if its elastic it falls onthe employers.