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?

Question

Quizplus · Accepted Answer

If the government announces a tax increase on workers' wages, this means that workers will receive a lower net income because they pay a greater share of their income as taxes. This can lead to a decrease in demand for goods and services because workers will have less disposable income. As a result, there may be a decrease in employment since firms may reduce their output due to the lower demand. The reduction in demand may also lead to a decrease in the real wage rate as firms may lower wages to compensate for the lower demand. Therefore, the best choice is C where employment would increase but the real wage would decrease.

The Government Announces a Tax Increase on Workers' Wages to Take