The government is concerned about low employment rates and low earnings of young persons under the age of 25, including those who are no longer in school. It wants to help younger persons get started in the labor market. The government is considering a Social Security payroll tax cut for younger workers. This payroll tax is used to finance Social Security income benefits for retirees. The payroll tax is assessed equally on employers and employees: 6.2% each for a total of 12.4% on the first $133,000 of earnings. (For simplicity, you can treat the payroll tax as a unit tax on labor.) The proposal would eliminate this tax until age 25. Young workers would continue to accumulate eligibility for retirement benefits as if they and their employers were making payroll tax payments on their earnings. Required:
a. Discuss the likely effects of this policy in different areas.
b. Use a supply and demand diagram of the labor market for youth to illustrate the impact of the repeal of the payroll tax on the take-home wage of young workers and the youth employment level.