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

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 (the real wage is equal for both treatments); wage and tax remain unchanged for the control group. Both treatments had significantly smaller increases in effort levels than the control group and the increases are not different between treatments. Therefore, »net wage illusion« and »tax aversion« identified in previous studies are not supported.