Question

In: Economics

The government announces a tax increase on workers' wages to take effect in the future. What...

The government announces a tax increase on workers' wages to take effect in the future. What happens to current employment and the real wage rate?

Both employment and the real wage rate would increase.

Both employment and the real wage rate would decrease.

Employment would increase and the real wage would decrease.

Employment would decrease and the real wage would increase.

Solutions

Expert Solution

Answer: Employment would increase and the real wage would decrease.

When the taxes on the worker's wages increase, the wages that the person receive in hand is very less because tax gets deducted from their income. So, the real wages decrease because of the decrease in consumption. To increase the consumption, employment would increase and supply for workforce increases.

Rahul Sunny answered 2 years ago
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