The supply-side effects of a change in taxes on labour income mean that ________ in taxes on labour income shifts the ________.

Question

Quizplus · Accepted Answer

An increase in taxes on labour income means that workers will have less incentive to work or will demand higher wages to compensate for the higher taxes. Therefore, the labour supply curve, which shows the quantity of labour supplied at each wage rate, shifts leftward. The labour demand curve, which shows the quantity of labour demanded at each wage rate, is not affected by the tax change and remains the same. As a result, the equilibrium quantity of labour decreases, which causes wages to increase and employment to decrease.

The Supply-Side Effects of a Change in Taxes on Labour