Taxes, oil prices, and workers Everyone in the labor force is concerned with two things: whether they have a job and, if so, their after-tax income from that job (i.e., their after-tax real wage). An unemployed worker may also be concerned with the availability and amount of unemployment benefits, but we will leave that issue aside for this problem.
a. Suppose there is an increase in oil prices. How will this affect the unemployment rate in the short run and the medium run? How will it affect the real wage (W/P)?
b. Suppose there is a reduction in income taxes. How will this affect the unemployment rate in the short run and the medium run? How about the real wage? For a given worker, how will after-tax income be affected?
c. According to our model, what policy tools does the government have available to increase the real wage?
d. During 2003 and 2004, oil prices increased more or less at the same time that income taxes were reduced. A popular joke at the time was that people could use their tax refunds to pay for the higher gas prices. How do your answers to this problem make sense of this joke?