Question

in the labor market , there is a decrease in tax rate .

while in the diagram of wages and employment, there is a shift downwards of the labor supply curve.

Describe the economic intuition behind the movement in the wage rate ? in response to the tax cut. Further, you are told that the Government is not happy with the change in wages and is considering making any adjustments to wages unlawful. What would be the economic and fiscal implications of such policy?

explain your findings

(limit your answer to 150 words)

Answer 1

Solution:-

A typical supply curve shows an increase in supply as wages rise. It slopes from left to right.

However, in labour markets, we can often witness a backward bending supply curve. This means after a certain point, higher wages can lead to a decline in labour supply. This occurs when higher wages encourage workers to work less and enjoy more leisure time.

There are two effects related to determining supply of labour.

The substitution effect states that a higher wage makes work more attractive than leisure. Therefore, in response to higher wages, supply increases because work gives greater remuneration.

The income effect states that a higher wage means workers can achieve a target income by working fewer hours. Therefore, if wages increase, it becomes easier to get enough income through working fewer hours.