Answer to Question #95521 in Macroeconomics for Maryum

Question

Consider the effect of a government subsidy whereby 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 position of Aggregate supply schedule.

Answer 1

Government Wage Subsidy and its Effects on Employment, Output and Position of Aggregated Supply Schedule. 

Government wage subsidies reduces the cost of labor and mostly it is adopted by most of the developing countries as part of their labor market policy. If the government issues a subsidy the effect is to shift the supply curve to the right leading to lower price and higher demand for goods and services.  

Wage subsidies tends to lower the net wages paid to workers. In competitive markets the employment effect relies on responsiveness of labor demand and supply to wages. If labor demand and supply to wages is inelastic the subsidy does not enhance employment. The subsidy will have an effect of financial gain to employers or employees. This subsidies disadvantages groups like the younger, older, low skilled and workers with disabilities. 

If demand is elastic the subsidy causes rise in demand and small price drop hence producer surplus (output) increases more than consumer surplus. Therefore the position of aggregate supply curve shifts outward because the natural rate of output rises. 

References 

Rita Almeida, Larry Orr & David Robalino;30september 2019;<https://izajolp.springeropen.com/articles/10.1186/2193-9004-3-12.