Econ.

In recent years, some policymakers have proposed requiring firms to give workers certain fringe benefits. For example, in 1993, President Clinton proposed requiring firms to provide
health insurance to their workers. Let’s consider the effects of such a policy on the labor market.

a. Suppose that a law required firms to give each worker $3 of fringe benefits for every hour that the worker is employed by the firm. How does this law affect the marginal profit that firm earns from each worker?
Wouldn't this decrease the marginal profit by three dollars per worker.

How does the law affect the demand curve for labor? Draw your answer on a graph with the cash wage on the vertical axis.
Wouldn't it be two demand curves D1 being the prior situation without the fringe benefits and D2 being the situation with the fringe benefits. So wouldn't that mean that D2 would be to the left of D1.

b. If there is no change in labor supply, how would this law affect employment and wages?
Wouldn't employment and wages decrease because of the law.

c. Why might the labor supply curve shift in response to this law?
Wouldn't the labor supply curve shift because it cost the firms more money to employ the workers which eats into their profits.

Would this shift in labor supply raise or lower the impact of the law on wages and employment?
Wouldn't this mean that there would be an increase impact of the law on wages and employment.

d. As Chapter 6 discussed, the wages of some workers, particularly the unskilled and inexperienced, are kept above the equilibrium level by minimum-wage laws. What effect would a fringe-benefit mandate have for these workers? Wouldn't the effect be a reduction in employing these workers.

a) I think you are correct, in the short run. (cept $3 per worker per hour).

a2) I think you are correct, with the vertical distance between D1 and D2 being $3.

b) again correct.

c) The labor supply reflects the willingness of workers to work. The new law would cause the labor supply to shift to the right (increase) because for each hour worked they get w+3 wages instead of just w.

Relative to b) cash wages drop, employment rises. In fact, I would argue, the final equilibrium (except for minimum wage workers) would be about where things started in the first place. Total employment goes back to where it was, cash wages, drops by about $3 per hour, but total compensation stays about where it started.

d) you are correct.

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asked by Jenny

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