An increase in taxes on labor earnings,everything else equal
A)shifts the labor supply curve to the left and increases the real wage.
B)shifts the labor supply curve to the right and increases the real wage.
C)shifts the labor supply curve to the right and reduces the real wage.
D)shifts the labor supply curve to the left and reduces the real wage.

Question

Quizplus · Accepted Answer

An increase in taxes on labor earnings, everything else being equal, makes working less attractive because workers get to keep less of their earnings. This decrease in attractiveness leads to a decrease in the quantity of labor supplied at any given wage, shifting the labor supply curve to the left. As the supply of labor decreases, the real wage (the wage adjusted for inflation, representing the purchasing power of income) increases because employers must pay more to attract the smaller number of workers willing to work at the higher tax rate.

An Increase in Taxes on Labor Earnings,everything Else Equal