Labor Supply Reaction to Wage Cuts and Tax Increases: A Real-Effort Experiment

ISER DP No. 1100, 2020

24 Pages Posted: 3 Nov 2020

See all articles by Tomoharu Mori

Tomoharu Mori

College of Comprehensive Psychology, Ritsumeikan University; Research Institute for Socionetwork Strategies, Kansai University

Hirofumi Kurokawa

School of Economics and Management

Fumio Ohtake

Osaka University - Center for Infectious Disease Education and Research

Date Written: September 9, 2020

Abstract

We investigate the labor supply reaction to wage cuts and tax increases using a real-effort experiment. First, subjects perform a task and receive a reward with taxes deducted. Second, the wage cut treatment reduces the wage rate and the tax increase treatment increases the tax; wage and tax remain unchanged for the control group. The real wage is equal for both treatments, and both treatments had significantly smaller increases in effort levels than the control group. The effort level change did not differ between the treatments. Therefore, the net wage illusion and tax aversion identified in previous studies are absent.

Keywords: labor supply, net wage illusion, tax aversion

JEL Classification: C91, H24, J24

Suggested Citation

Mori, Tomoharu and Kurokawa, Hirofumi and Ohtake, Fumio, Labor Supply Reaction to Wage Cuts and Tax Increases: A Real-Effort Experiment (September 9, 2020). ISER DP No. 1100, 2020, Available at SSRN: https://ssrn.com/abstract=3692115 or http://dx.doi.org/10.2139/ssrn.3692115

Tomoharu Mori (Contact Author)

College of Comprehensive Psychology, Ritsumeikan University ( email )

2-150, Iwakuracho
Ibaraki, Osaka 5678570
Japan

Research Institute for Socionetwork Strategies, Kansai University ( email )

3-3-35 Yamatecho
Osaka, 564-8680
Japan

Hirofumi Kurokawa

School of Economics and Management ( email )

Japan

Fumio Ohtake

Osaka University - Center for Infectious Disease Education and Research ( email )

1-7 Machikaneyamacho
Toyonaka
Osaka, 560-0043
Japan

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