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Q2 2. Labour's sh are and policy. 5 uppose that a political party wants to increase labour's share of income after tax. Analyse how the following measures might affect labo ur's share: (a) Limits on the number of rms that enter individual markets Limits on the number of rms that enter individual markets will reduce competition, increase markups and pure profits, and reduce the labour share of income. [As we will see in chapter 5, investment and the long run level of capital will also decrease.) (b) Increased taxes on non-labour incomes such as dividends and interest and (6] reduced taxes on wage income lncreased taxes on non-labour incomes and reduced taxes on wage income will not necessarily change the pretax labour share, so the labour share of after tax income should increase. [As we will see in Chapter 5, the long run level of income may fall, however, because there will be a negative effect on investments and the long run level of the capital stock.) A law stipulating reduced working hours A law stipulating reduced working hours is equivalent to a reduction in the technology factor E. It will reduce the level of income without any effect on the labour share. [In an exercise in chapter 6, we will analyse how employment and long run income is affected.) (d) If you could recommend a policy to the party based on the theory developed above, what would you reco mmend? Perhaps the most important thing would be to increase the degree of competition in the economy [aim for a low markup ,u]. This could be either through removing barriers to competition in the domestic economy, or by opening up the domestic economy to a greater degree of foreign competition. In the longer term, if the government were able to promote the development and use of technologies which make intensive use of labour [aim for a lower (I). But shaping the direction of technological progress in the world is hard, so don't put too much faith in this one. Arguably, you could also try to convince the party to focus more on raising market wages rather than just labout's share. This can be achieved by promoting anything which boosts the production function: faster technological development, greater capital accumulation, higher employment, et cetera