Suppose That You Are Unemployed and Collecting Unemployment Insurance Benefits

Essay

Suppose that you are unemployed and collecting unemployment insurance benefits of $200 per week, and suppose that your income is tax-free. Your employment counselor calls you and reports that she has found you a job that offers 40 hours of work per week at $12.50 per hour. You do some quick calculations and discover that your after-tax earnings from this job would be $360 per week. If unemployment benefits are cut off as soon as you regain employment, what is the real take-home wage rate from your new job offer? What does that make the tax rate on your earnings? (Hint: the loss of benefits is an implicit tax.)