Answer to Question #286677 in Macroeconomics for Boyle

Question

Consider the effects of a government employment subsidy whereby the government paid 10 percent of the wages of newly hired workers. How would employment and output be affected by the program in the classical model? What would be the effect on the position of the aggregate supply schedule in Figure 3-6(Ch 3 Froyen)?

Answer 1

If government subsidies wage the cost of labour reduces in the country. It is in most cases applied by developing countries as part of their labour market policy. This causes a shift in supply curve outwards leading to lower prices and increased demand for goods and services.  

Wage subsidies lowers the net wages paid to workers. Employment in competitive markets relies on responsiveness of demand for labour and wage supply. If demand for labour and supply to wages become inelastic, the subsidy has no effect on employment but it affects financial gain to employers or employees. Some groups like the younger, older, low skilled and workers with disabilities may be disadvantaged. 

In the event that demand is elastic the subsidy causes an increase in demand and a small drop in price hence producer surplus increases more than consumer surplus. Therefore, the position of aggregate supply curve shifts outward because the natural rate of output rises.