a) The Targeted Jobs Tax Credit (TJTC) – enacted in 1978 and expired in 1994 – offered employers a tax credit for each less-skilled worker they employed. Assume that the tax credit was fixed at $5 per-hourworked by a less-skilled worker. According to neoclassical theory, how should this tax credit have affected wages and employment of less-skilled workers? Explain and show graphically.
b) Suppose that instead of offering a tax credit to employers to hire less-skilled workers, the government decides to increase employer payroll taxes to finance an expansion of unemployment insurance. i) Use graphs to explain how the incidence of the payroll tax – i.e., the share of the tax borne by workers versus employers. ii) Explain and show graphically how employment levels depend on the elasticity of the labor supply curve.