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Friday, July 8, 2011

Carbon Tax to reduce Unemployment

Henry Ergas claims in an article in The Australian today that unemployment will fall as a result of the government's carbon tax.

The article, oddly entitled "Black hole in government's carbon tax compensation plan", Henry Ergas explains "A carbon tax increases prices relative to wages. As the Ross Garnaut report acknowledges, that reduces incentives to work, which are already blunted by the income tax. With reduced work incentives lowering labour supply..."

What this in fact says is the carbon tax will cause unemployment to fall.

The unemployment rate is a measure of the number of people seeking employment who are not able to find work. When the number of people seeking work declines, the unemployment rate goes down.

Henry Ergas argues that the introduction of the carbon tax will lower the labour supply, which means there will be fewer people looking for work.