If the market supply of labor services is perfectly inelastic, a tax on labor income will reduce the net wages received by workers by the full amount of the tax per labor hour.

Question

Quizplus · Accepted Answer

If the market supply of labor services is perfectly inelastic, it means that the quantity of labor supplied remains the same regardless of the wage rate. In this case, when a tax is imposed on labor income, workers cannot reduce their labor supply to avoid the tax, and thus the full amount of the tax per labor hour will be passed on to the workers in the form of reduced net wages.

If the Market Supply of Labor Services Is Perfectly Inelastic