Question

Suppose the government were to provide wage subsidies to childcare workers.

a. Using a simple diagram, illustrate the effect of this policy on the wages and employment of childcare workers, their employers’ costs and the price and quantity of childcare services exchanged.

b. In order to pay for this subsidy, the government must raise tax revenue. Suppose it does so by imposing a tax on the wages of all workers. Using a simple diagram, illustrate the effect of this policy on the wages and employment of non-childcare workers, their employers’ costs and the price and quantity of non-childcare labour services exchanged.

c. Summarize the effects of this tax and transfer policy on different groups, i.e. who gains and who loses from this policy?

Answer 1