Assume you are an economist at Ministry of Economy. During the budget consultations, a participant suggested that the government should consider using income tax as a tool for improving productivity. The Principal Economic Planning Officer has directed you to provide him with the analysis of the impact of income tax changes on labour market. Using relevant diagram(s) illustrate and discuss the implications of changes in the income tax on labour market.

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Asked Oct 26, 2019
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Assume you are an economist at Ministry of Economy. During the budget consultations, a participant suggested that the government should consider using income tax as a tool for improving productivity. The Principal Economic Planning Officer has directed you to provide him with the analysis of the impact of income tax changes on labour market. Using relevant diagram(s) illustrate and discuss the implications of changes in the income tax on labour market.

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Expert Answer

Step 1

The interaction of labor demand by the business firms and labor supply by the workforce of the economy is called labor market.

The tax levied on income is called income tax.

Step 2

The labor demand curve slopes downward because a higher wage increases the cost of production of firms. Thus, firms demand more labor at a lower wage. Conversely, a higher wage encourages the workers to enter the market. Thus, labor supply curve slopes upward.

Step 3

Fig (1) below depicts the labor market. Here initially the labor market is in equilibrium at point E, where labor demand LD...

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Labor Market Wage Ls E W LD Quantity of labor L Figure (1)

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