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Unformatted text preview: What happens when the labor market is restricted in some way? Recall the case in the goods and services market where the government installs artificial limits on the market, such as taxes, price ceilings, or price floors. The government does similar things in the labor market, as well. Workers pay income taxes on their wages, and firms are required to pay no less than a regulated minimum wage for the labor they demand. These restrictions cause distortions in the way that the labor market works. For instance, the U.S. runs on a progressive income tax system: for the first chunk of money you make, you pay no taxes, so you get to take home every penny that you earn. For the second chunk of money, you pay some taxes, so your take- home pay is a little lower. For your third chunk of money, the tax is a little higher, and so on. This means lower....
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- Fall '11