Explain what will happen to the equilibrium real wage and quantity of labor for each of the following scenarios, and use a graph of the aggregate labor market to show the changes
a. The government decreases income tax rates.
b. The skill level of workers increases.
c. A hurricane destroys a large portion of the capital stock.
d. Workers increase their preference of labor over leisure.
e. A technological change occurs that increases the productivity of all workers, and at the same time the government increases income tax rates.
f. The overall skill level of workers decreases, and at the same time household wealth increases.
a. A decrease in income tax rates will increase the supply of labor, shifting the labor supply curve to the right, which decreases the equilibrium wage and increases the quantity of labor. On the graph, this is represented by a shift from S1 to S2,
b. An increase in the skill level of workers will increase the demand for labor, shifting the labor demand curve to the right, which increases the equilibrium wage and increases the quantity of labor. On the graph, this is represented by a shift from D1 to D2.
c. Destruction of the capital stock will decrease the demand for labor, shifting the labor demand curve to the left, which decreases the equilibrium wage and decreases the quantity of labor. On the graph, this is represented by a shift from D2 to D1.
d. An increase in workers' preference of labor over leisure will increase the supply of labor, shifting the labor supply curve to the right, which decreases the equilibrium wage and increases the quantity of labor. On the graph, this is represented by a shift from S1 to S2.
e. Increased worker productivity will increase the demand for labor, shifting the labor demand curve to the right, which increases the equilibrium wage and increases the quantity of labor. On the graph, this is represented by a shift from D1 to D2
An increase in income tax rates will decrease the supply of labor, shifting the labor supply curve to the left, which increases the equilibrium wage and decreases the quantity of labor. On the graph, this is represented by a shift from S2 to S1.
When these two events occur at the same time, we know for sure that the equilibrium real wage will increase. The new equilibrium quantity of labor may increase, decrease, or stay the same, depending on the magnitudes of the changes in demand and supply.
f. Decreased skill level of workers will decrease the demand for labor, shifting the labor demand curve to the left, which decreases the equilibrium wage and decreases the quantity of labor. On the graph, this is represented by a shift from D2 to D1
An increase in household wealth will decrease the supply of labor, shifting the labor supply curve to the left, which increases the equilibrium wage and decreases the quantity of labor. On the graph, this is represented by a shift from S2 to S1.
When these two events occur at the same time, we know for sure that the equilibrium quantity of labor will decrease. The new equilibrium real wage may increase, decrease, or stay the same, depending on the magnitudes of the changes in demand and supply.
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