IDEAS home Printed from https://ideas.repec.org/p/dpr/wpaper/1100.html
   My bibliography  Save this paper

Labor supply reaction to wage cuts and tax increases: A real-effort experiment

Author

Listed:
  • Tomoharu Mori
  • Hirofumi Kurokawa
  • Fumio Ohtake

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.

Suggested Citation

  • Tomoharu Mori & Hirofumi Kurokawa & Fumio Ohtake, 2020. "Labor supply reaction to wage cuts and tax increases: A real-effort experiment," ISER Discussion Paper 1100, Institute of Social and Economic Research, Osaka University.
    • Handle: RePEc:dpr:wpaper:1100
    as

    Download full text from publisher

    File URL: https://www.iser.osaka-u.ac.jp/library/dp/2020/DP1100.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. George A. Akerlof & Janet L. Yellen, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(2), pages 255-283.
    2. Ernst Fehr & Georg Kirchsteiger & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(2), pages 437-459.
    3. Felipe A. Araujo & Erin Carbone & Lynn Conell-Price & Marli W. Dunietz & Ania Jaroszewicz & Rachel Landsman & Diego Lamé & Lise Vesterlund & Stephanie W. Wang & Alistair J. Wilson, 2016. "The slider task: an example of restricted inference on incentive effects," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 2(1), pages 1-12, May.
    4. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 1997. "Reciprocity as a Contract Enforcement Device: Experimental Evidence," Econometrica, Econometric Society, vol. 65(4), pages 833-860, July.
    5. Blumkin, Tomer & Ruffle, Bradley J. & Ganun, Yosef, 2012. "Are income and consumption taxes ever really equivalent? Evidence from a real-effort experiment with real goods," European Economic Review, Elsevier, vol. 56(6), pages 1200-1219.
    6. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 175-208.
    7. Sebastian Kube & Michel André Maréchal & Clemens Puppe, 2013. "Do Wage Cuts Damage Work Morale? Evidence From A Natural Field Experiment," Journal of the European Economic Association, European Economic Association, vol. 11(4), pages 853-870, August.
    8. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-1177, September.
    9. Pántya, József & Kovács, Judit & Kogler, Christoph & Kirchler, Erich, 2016. "Work performance and tax compliance in flat and progressive tax systems," Journal of Economic Psychology, Elsevier, vol. 56(C), pages 262-273.
    10. Doerrenberg, Philipp & Duncan, Denvil, 2014. "Experimental evidence on the relationship between tax evasion opportunities and labor supply," European Economic Review, Elsevier, vol. 68(C), pages 48-70.
    11. Robert Gibbons, 1998. "Incentives in Organizations," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 115-132, Fall.
    12. Sebastian Kube & Michel Andre Marechal & Clemens Puppe, 2012. "The Currency of Reciprocity: Gift Exchange in the Workplace," American Economic Review, American Economic Association, vol. 102(4), pages 1644-1662, June.
    13. David Gill & Victoria Prowse, 2012. "A Structural Analysis of Disappointment Aversion in a Real Effort Competition," American Economic Review, American Economic Association, vol. 102(1), pages 469-503, February.
    14. Raj Chetty, 2012. "Bounds on Elasticities With Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply," Econometrica, Econometric Society, vol. 80(3), pages 969-1018, May.
    15. Ernst Fehr & Jean-Robert Tyran, 2001. "Does Money Illusion Matter?," American Economic Review, American Economic Association, vol. 91(5), pages 1239-1262, December.
    16. Sillamaa, M. A., 1999. "How work effort responds to wage taxation: An experimental test of a zero top marginal tax rate," Journal of Public Economics, Elsevier, vol. 73(1), pages 125-134, July.
    17. Sillamaa, M. A., 1999. "How work effort responds to wage taxation: A non-linear versus a linear tax experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 39(2), pages 219-233, June.
    18. George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(4), pages 543-569.
    19. Blaufus, Kay & Bob, Jonathan & Hundsdoerfer, Jochen & Kiesewetter, Dirk & Weimann, Joachim, 2013. "Decision heuristics and tax perception – An analysis of a tax-cut-cum-base-broadening policy," Journal of Economic Psychology, Elsevier, vol. 35(C), pages 1-16.
    20. Naomi E. Feldman & Bradley J. Ruffle, 2015. "The Impact of Including, Adding, and Subtracting a Tax on Demand," American Economic Journal: Economic Policy, American Economic Association, vol. 7(1), pages 95-118, February.
    21. Kessler, Judd B. & Norton, Michael I., 2016. "Tax aversion in labor supply," Journal of Economic Behavior & Organization, Elsevier, vol. 124(C), pages 15-28.
    22. Hirofumi Kurokawa & Tomoharu Mori & Fumio Ohtake, 2016. "A Choice Experiment on Taxes: Are Income and Consumption Taxes Equivalent?," ISER Discussion Paper 0966, Institute of Social and Economic Research, Osaka University.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Blumkin, Tomer & Pinhas, Haim & Zultan, Ro’i, 2020. "Wage Subsidies and Fair Wages," European Economic Review, Elsevier, vol. 127(C).
    2. Fortuna Casoria & Arno Riedl, 2013. "Experimental Labor Markets And Policy Considerations: Incomplete Contracts And Macroeconomic Aspects," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 398-420, July.
    3. Fortuna Casoria & Arno Riedl, 2013. "Experimental Labor Markets And Policy Considerations: Incomplete Contracts And Macroeconomic Aspects," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 398-420, July.
    4. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 3, pages 229-330, Elsevier.
    5. Dohmen, Thomas, 2014. "Behavioral labor economics: Advances and future directions," Labour Economics, Elsevier, vol. 30(C), pages 71-85.
    6. Tomer Blumkin & Haim Pinhas & Ro'i Zultan, 2017. "Leveraging Wage Subsidies to Facilitate Fair Wages and Increase Social Welfare," CESifo Working Paper Series 6597, CESifo.
    7. Bejarano, Hernán & Corgnet, Brice & Gómez-Miñambres, Joaquín, 2021. "Economic stability promotes gift-exchange in the workplace," Journal of Economic Behavior & Organization, Elsevier, vol. 187(C), pages 374-398.
    8. Gagnon, Nickolas & Noussair, C., 2016. "Does Reciprocity Persist Over Time?," Research Memorandum 033, Maastricht University, Graduate School of Business and Economics (GSBE).
    9. Yan Chen & Peter Cramton & John A. List & Axel Ockenfels, 2021. "Market Design, Human Behavior, and Management," Management Science, INFORMS, vol. 67(9), pages 5317-5348, September.
    10. Cao, Cangjian & Li, Sherry Xin & Liu, Tracy Xiao, 2020. "A gift with thoughtfulness: A field experiment on work incentives," Games and Economic Behavior, Elsevier, vol. 124(C), pages 17-42.
    11. Kessler, Judd B. & Norton, Michael I., 2016. "Tax aversion in labor supply," Journal of Economic Behavior & Organization, Elsevier, vol. 124(C), pages 15-28.
    12. Lu, Kelin, 2022. "Overreaction to capital taxation in saving decisions," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    13. Currie, Janet & Lin, Wanchuan & Meng, Juanjuan, 2013. "Social networks and externalities from gift exchange: Evidence from a field experiment," Journal of Public Economics, Elsevier, vol. 107(C), pages 19-30.
    14. Sautua, Santiago I., 2023. "Disentangling the influences of positive reciprocity and mood on gift exchange at work," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 102(C).
    15. Gose, Karina & Sadrieh, Abdolkarim, 2014. "Strike, coordination, and dismissal in uniform wage settings," European Economic Review, Elsevier, vol. 70(C), pages 145-158.
    16. Alain Cohn & Ernst Fehr & Lorenz Goette, 2015. "Fair Wages and Effort Provision: Combining Evidence from a Choice Experiment and a Field Experiment," Management Science, INFORMS, vol. 61(8), pages 1777-1794, August.
    17. Boosey, Luke & Goerg, Sebastian, 2020. "The timing of discretionary bonuses – effort, signals, and reciprocity," Games and Economic Behavior, Elsevier, vol. 124(C), pages 254-280.
    18. Johannes Becker & Daniel Hopp & Karolin Süß, 2020. "How Altruistic Is Indirect Reciprocity? - Evidence from Gift-Exchange Games in the Lab," CESifo Working Paper Series 8423, CESifo.
    19. Tanjim Hossain & King King Li, 2014. "Crowding Out in the Labor Market: A Prosocial Setting Is Necessary," Management Science, INFORMS, vol. 60(5), pages 1148-1160, May.
    20. Brandes, Leif & Franck, Egon, 2012. "Social preferences or personal career concerns? Field evidence on positive and negative reciprocity in the workplace," Journal of Economic Psychology, Elsevier, vol. 33(5), pages 925-939.

    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dpr:wpaper:1100. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Librarian (email available below). General contact details of provider: https://edirc.repec.org/data/isosujp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.