The government increases the tax rate on labour income.At the equilibrium level of employment, the before- tax wage rate _______ and the after- tax wage rate _______.

Question

Quizplus · Accepted Answer

When the government increases the tax rate on labour income, the after-tax wage rate will decrease. This is because workers will require a higher before-tax wage in order to maintain their desired after-tax wage. As a result, employers will only be willing to employ workers at a higher before-tax wage, leading to an increase in the wage rate. However, since the tax rate has increased, the after-tax wage rate will ultimately be lower than before, resulting in a rise in the before-tax wage rate and a fall in the after-tax wage rate. At the equilibrium level of employment, this will result in a rise in the before-tax wage rate and a fall in the after-tax wage rate. Therefore, choice B, rises; falls is the correct answer.

The Government Increases the Tax Rate on Labour Income