Problem: As we saw in class, the Earned Income Tax Credit was introduced in 1975 for low-income workers with children. For simplicity, assume that individuals eligible for the EITC in 1975 earn $10 an hour and that the EITC subsidy is $4 an hour (ignoring the plateau and phase-out regions of the EITC for this question). Recall that the EITC subsidy is paid to the worker rather than the firm.
a. When introduced in 1975, how would this new tax credit affect the labor market for eligible workers? Use a graph to illustrate your answer, clearly labeling all relevant points on the graph (and showing the initial equilibrium wage and employment in the absence of the EITC). What has happened to the wage received by workers compared to the labor market without the EITC? What has happened to employment? Explain briefly.