ABSTRACT
This chapter shows that the implications of incorporating the results from the microeconomic analysis of labour supply into a standard macroeconomic model. It examines the effects of assuming that labour supply depends on the net rather than the gross wage assuming a positive elasticity of supply and a proportional income tax. The chapter considers possibility of a negative elasticity of labour supply, where the assumption of proportional taxes is retained. It looks at the macro-economic implications of non-proportional taxes, and summarises combined results. The amounts of labour actually employed, the full employment level of income and the levels of unemployment are all altered relative to the standard model. In the standard Keynesian macro-economic treatment equilibrium in the labour market occurs where the aggregate supply curve of labour intersects the aggregate demand curve for labour.
