ISSN (Print) 0473-453X

Discussion Paper No. 1100

ISSN (Online) 2435-0982

LABOR SUPPLY REACTION
TO WAGE CUTS AND TAX INCREASES:A REAL-EFFORT EXPERIMENTTomoharu Mori
Hirofumi Kurokawa
Fumio Ohtake

September 2020

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

Labor supply reaction to wage cuts and tax increases: A
real-effort experiment*
Tomoharu Moria, Hirofumi Kurokawab, and Fumio Ohtakec

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 thecontrol 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 codes: C91, H24, J24*

The authors are grateful for financial support from the Joint Usage/Research Center at ISER, Osaka
University.
aCorresponding author: College of Comprehensive Psychology, Ritsumeikan University. E-mail:tmr15047@fc.ritsumei.ac.jpbSchool of Economics and Management, University of Hyogo. kurokawa@em.u-hyogo.ac.jpcGraduate School of Economics, Osaka University. ohtake@econ.osaka-u.ac.jp
11. Introduction
The impacts of wage levels and changes on the labor supply and work motivation areimportant variables in labor and public economics (e.g., Chetty 2012; Gibbons 1998). Wages
not only affect workers’ well-being through consumption, but also directly affect their wellbeing through psychological and sociological processes (Akerlof 1982; Akerlof and Yellen1990). Economic experiments have shown that wage levels can influence labor supply
behaviors even when wages are not tied to workers’ output or the effort levels are unobservable(e.g., Fehr et al. 1993, 1997). Some studies have also examined whether raising wages increases
the labor supply (e.g., Gneezy and List 2016; Kube et al. 2012). Many studies discussed thefact that raising and lowering wages is an asymmetric process, and that the negative reaction
to lowering wages has long been known as the downward rigidity of wages (e.g., Bewley 1999).
The negative effects of lowering wages are also experimentally studied by Kube et al. (2013).
The taxation of workers is also an important topic in labor and public economics (e.g.,
Mirrlees 1971). Several experimental studies have investigated the effects of taxation on thelabor supply, such as Swenson (1988) and Sillamaa (1999a, b). One basic but importantquestion is whether workers react to taxations or the change in real wages. If workers react toreal wages, other factors such as gross wages and the way taxes are collected should have noeffect on the labor supply. If so, policymakers need only understand labor supply elasticity
when setting taxes. However, recent experimental studies cited below have shown that workers
determine their labor supply not only based on real wages, but also on gross wages and thereasons for wage changes.
There are two literature streams on the impact of taxes on effort levels. One shows thatworkers respond to pre-tax gross wages rather than post-tax real wages. Fochmann et al. (2013)
called this phenomenon “net wage illusion” and experimentally tested workers by assigningthem to one of three treatments with the same real wages but different gross wages and income
tax rates (0%, 25%, and 50%) for performing a task (i.e., folding letters). Work performance2was significantly higher for the treatments with higher gross wages (and higher income tax
rates), indicating that workers determined their levels of effort according to their gross wages.
Other studies show that individuals are strongly averse to having their money taken from themas taxes. Kessler and Norton (2016) called this phenomenon “tax aversion”; in their experiment,
participants had their real wages reduced by 50% after 10 minutes of a typing task. One
treatment described this reduction as “lowering wages” and the other as “introducing taxes.” Acomparison of the two treatments showed that performance increased for the wage reduction
treatment (probably due to learning effects), while it did not increase for the tax introduction
treatment.
These two results appear contradictory, in that the former shows that people respond less totaxes, while the latter shows a strong aversion to them. However, the results are not necessarily
contradictory. On the one hand, the net wage illusion is a phenomenon related to inattention,
under which people act without being aware of taxes. In Fochmann et al.’s (2013) experiment,taxes did not change within the session, which may indicate that less attention was paid to thetax. Tax aversion, on the other hand, refers to how people react to taxes when they are awareof them. Kessler and Norton’s (2016) experiment introduced wage cuts and taxes within thesession, which started from no tax and ranged to a high tax rate of 50%, thus making it easierfor participants to be aware of the mid-session changes.
We conducted a laboratory experiment to complement these studies and explain their results.
The purpose of our study is twofold: first, to test whether the net wage illusion is observed
when real wages vary within an experiment, and second, to test whether tax aversion isobserved when tax rates change in an experiment. The experiment consisted of two rounds. In
the first round, participants performed a slider task (Gill and Prowse 2012) for 10 minutes andreceived a reward (JPY 5 per slider). This reward was subject to a hypothetical income tax (JPY
1 per slider). That is, the real wage per subject is JPY 4 per slider. In the second round, theslider task was performed for 10 minutes in the same way, but the reward structure was different
3for three treatments: the first was the control group, which used the same setting as in the firstround; the second was the wage cut treatment, in which the reward was lowered to JPY 3 perslider and the income tax (JPY 1 per slider) remained unchanged; and the third treatment was
the tax increase treatment, under which the compensation remained at JPY 5 per slider, while
the income tax was increased to JPY 3 per slider. The real wages under the wage cut and tax
increase treatments were equal, but the explanation for the real wage reduction was different.
This experiment complements Fochmann et al.’s (2013) and Kessler and Norton’s (2016)
studies as follows. Wage cuts and tax increases are considered to be high in terms of attention
because of the changes occurring within the session. Ours is a different setting from that of
Fochmann et al. (2013), which does not change within the session, but is the same as that of
Kessler and Norton (2016), which varies within the session. In our experiment, tax is imposedfrom the first round, while its level changes in the second round in the tax increase treatment.
This setting is different from that of Kessler and Norton (2016), who introduced a new tax inthe second round. In summary, our experiment was set up differently and we believe it canconfirm the robustness of their results.
The main hypotheses of this study are as follows. If participants only determine their effort
level in response to real wages, then the effort level should be lower under the wage cut
treatment than for the control group. Similarly, the tax increase treatment should also have alower effort level than the control group. Since real wages are equal, the effort levels for thewage cut and tax increase treatments will be equal. If participants only determine the effort
level in response to gross wages (net wage illusion), the control group and tax increase
treatment will show equal effort levels, as they have equal gross wages, while the wage cut
treatment will have lower gross wages and, therefore, lower effort levels than the other twogroups. If participants distinguish between wage cuts and tax increases and are more inclined
to lower their effort levels in response to a tax increase (tax aversion), then the tax increase
treatment will have a lower effort level than the wage cut treatment.
4

The results show that the increase in the effort level from the first to the second round wassignificantly smaller under the wage cut and tax increase treatments than for the control group,
lowered by the decline in real wages. There was no significant difference between the wage cut
and tax increase treatments. The difference between the control group and wage cut treatment
implies no net wage illusion. Further, the absence of a difference between the wage cut and tax
increase treatments implies no tax aversion either. The results of this study are different fromthose of Fochmann et al. (2013) and Kessler and Norton (2016), thus making a novel
contribution to the literature.
The results of the current study show the “classic” result that individuals change their effort
level in response to a change in real wages. The reason for the lack of a net wage illusion may
be that participants were more likely to see changes in real wages due to wage cuts and tax
increases during the session. The reason for the lack of tax aversion may be that taxes wereintroduced from the first round and participants were thus not averse to their increase.
Our study contributes to the literature on behavioral biases on taxes, for example, tax salience(e.g., Chetty et al. 2009; Feldman and Ruffle 2015), non-equivalence between income andconsumption taxes (Blumkin et al. 2012; Kurokawa et al. 2016), and overestimation of thechanges in tax rates compared to changes in tax bases (Blaufus et al. 2013). Our study also
contributes to the experimental literature on tax evasion and compliance (e.g., Doerrenberg andDuncan 2014; Pántya et al. 2016).
The remainder of this paper is organized as follows. Section 2 describes the experimental
design, Section 3 explains the hypotheses of the study, Section 4 presents the results, andSection 5 discusses the results and draws conclusions.

2. Experimental Design
The experiment was conducted at the Economic Laboratory of the Institute of Social andEconomic Research, Osaka University, from June to October 2017, with 150 students
5participating in six sessions. The subjects were university students who were enrolled in theinstitute's subject pool. Participants received a JPY 1,200 reward for participation, withadditional rewards depending on the results of the real-effort task described below. The averageamount of total compensation (including participation fee) was JPY 1,883 (around USD 17 at
the time). The experiment was programmed by zTree (Fischbacher 2007). The task instructions
are described in the Appendix.
A slider task (Gill and Prowse 2012) was used as the real-effort task to be performed by the
subjects. The slider task involves moving sliders on a computer screen to target positions using
only the mouse, as shown in Figure 1. At the beginning, all sliders show 0 and are at the left
end of the axis. When moved to the right end of the axis, they show 100. If subjects can movethe slider to position 50, they get one point. The sliders can be moved as many times as needed.
Forty-eight sliders were displayed on a single screen. Pressing the “Next” button in the upperright corner of the screen displayed a new screen. 1 There were five screens with sliders.
Therefore, subjects could earn a maximum of 240 points. In line real-world decision making,the design allowed subjects to choose “leisure," that is, not performing the task. As in Kessler
and Norton (2016), Internet use was allowed as leisure. However, few subjects used the Internet.

1

On the second and subsequent screens, the “Previous” button was shown in the upper-left corner, andwhen pressed, the previous screen was displayed.
6

Figure 1. Slider task

Our experimental design is based on that of Kessler and Norton (2016), but our experimental
purpose is an examination of the effect of lower real wages due to a tax increase for labor
supply. Therefore, while Kessler and Norton (2016) only introduced taxes in the second roundfor a specific treatment, we introduced them in the first round for all treatments.
The subjects performed two rounds of this task. The time limit for each round was 10 minutes.
At the beginning of the experiment, subjects were told that they would perform two rounds,
and the content of the first round was explained. That of the second round was explained after
the first round.
In the first round, we set a gross wage of JPY 5 per point for all treatments. Further, grosswages were taxed at JPY 1 per point, which means real wages were set at JPY 4 per point.
Subjects were informed that the tax would be returned to the experimenters and used for future7

experiments. The results of the first round were used in the analysis, as they were considered
to show the subjects’ ability. The screen showed gross wages, taxes, and nominal wages at thetop, according to the results of the work in progress.
In the second round, subjects’ gross wage, tax rate, and/or net wage were changed. Thechange depended on the experimental treatment. In the control group (2 sessions, N = 52), theexperiment was conducted using the same conditions as in the first round. In other words, thegross wage was JPY 5 per point with a tax of JPY 1 per point, resulting in a net wage of JPY 4
per point. Under the wage cut treatment (2 sessions, N = 46), the gross wage was lowered to
JPY 3 per point. Taxes were still set at JPY 1 per point, the same as in the first round. Therefore,
the net wage was set to JPY 2 per point. Under the tax increase treatment (2 sessions, N = 52),
the nominal wage remained at JPY 5 per point, but the tax amount was increased to JPY 3 perpoint. Therefore, the net wage was JPY 2 per point (equal to the wage cut treatment).

3. Hypotheses
The experimental parameters are summarized in Table 1. In the first round, the conditions
were the same under all treatments (the net wage was JPY 4 per point), and the effort levelshould have been equal if the subjects were randomly assigned. In the second round, the grossand net wages varied between treatments, meaning that the effort level could have beendifferent.

8

Table 1.

Experimental parameters
Control

Wage cut

Tax increase(N = 52)(N = 46)(N = 52)First round
Gross wage

5

5

5

Tax burden

1

1

1

Net wage44

4Gross wage

5

3

5

Tax burden

1

1

3

Net wage422Second round

Note: The numbers represent the rewards per experimental point in JPY.

The control group has the same conditions as in the first and second rounds, the net wage
being JPY 4 per point. The wage cut and tax increase treatments had net wages of JPY 2 perpoint in the second round. From the traditional economics perspective, the net wage affects theeffort level of the subject, not the gross wage. Therefore, the effort level in the second roundwas expected to be higher for the control group than for the wage cut or tax increase treatments.
Additionally, the effort levels were expected to be equal for the wage cut and tax increase
treatments. Therefore, we posit a hypothesis based on traditional economics for the second
round’s effort level:

Hypothesis 1 (traditional economics): Control > Wage cut treatment = Tax increase
treatment.

As shown by Fochmann et al.’s (2013) experiment, subjects may change their motivation
depending on nominal wages, as well as real wages. In our experiment, the wage cut and tax
increase treatments had the same net wages but different gross wages. The gross wage for thewage cut treatment was JPY 5 per point, which was equal to that of the control group, while9the gross wage for the tax increase treatment was JPY 3 per point. If subjects focused only on
gross and not real wages, we would expect the effort level in the second round to be higher
under the tax increase treatment than under the wage cut one, although the net wage is the same(net wage illusion). The control group and tax increase treatment would be expected to havethe same gross wage. Therefore, we propose a hypothesis based on net wage illusion for thesecond round’s effort level:

Hypothesis 2 (net wage illusion): Control = Tax increase treatment > Wage cut treatment

The reasons for the decline in net wage under the wage cut and tax increase treatments aredifferent. For the wage cut treatment, the reason is the reduction in wages. By contrast, for thetax increase treatment, the reason is the increase in the tax burden. According to Kessler and
Norton (2016), even when the net wage remains the same, tax increases reduce work
motivation more than wage cuts (tax aversion).2 Combined with the lower effort level for thewage cut treatment than for the control group in both Hypotheses 1 and 2, we posit a hypothesis
based on tax aversion for the second round’s effort level:

Hypothesis 3 (tax aversion): Control > Wage cut treatment > Tax increase treatment

4. Results
Figure 2 shows the effort level, measured by the number of correctly moved sliders in eachtreatment and round. In the first round, the mean effort level is 92.7, 96.2, and 97.7 for thecontrol group, wage cut treatment, and tax increase treatment, respectively. The difference

2

While the tax rate in the first round is 20%, those in the second round are 20%, 33.3%, and 60% for thecontrol group, wage cut treatment, and tax increase treatment, respectively.
10between the control group and wage cut treatment is not significant (t-test: t = -0.99, p = 0.33).3
The difference between the control group and tax increase treatment is also not significant (ttest: t = -1.23, p = 0.22).4 There is no difference in the effort level for the same conditions,which confirms successful random assignment of subjects.

Note: “Effort 1” represents the effort level in the first round and “Effort 2” the effort level inthe second round.
Figure 2. Effort levels in each treatment and round

The mean effort levels in the second round are 111.1, 109.5, and 109.7 for the control group,
wage cut treatment, and tax increase treatment, respectively. All groups have higher effort
levels than in the first round. The difference between the control group and wage cut treatment
is not significant (t-test: t = 0.39, p = 0.70). There is also no significant difference between the3

We hereafter report the p-value of the two-sided t-test. We employ conservative methods, although somehypothesis tests are suitable for the one-sided t-test.
4
The difference between the wage cut and tax increase treatments is also not significant (t-test: t = -0.34, p= 0.73).
11

control group and tax increase treatment (t-test: t = 0.29, p = 0.77). The net wage is higher forthe control group than for the wage cut or tax increase treatments, but there is no difference inthe effort level between the control group and wage cut or tax increase treatments. The twotreatments have different reasons for lower net wage, but there is no significant difference
between them in the effort level for the second round (t-test: t = 0.04, p = 0.97).

Result 1 (effort level in the second round): Control = Wage cut treatment = Tax increase
treatment

When looking at the effort level in the second round, there is no difference between
treatments. However, there is a difference in the change in effort levels from the first and second
rounds. The lower real wages under the wage cut and tax increase treatments may havemotivated subjects less than in the control group. Figure 3 shows the differences in the effort
levels between the first and second rounds by treatment. The control group increased its effort
level by 18.4 points, while the wage cut and tax increase treatments increased their effort levels
by only 13.3 points and 12.1 points, respectively.

12

Note: The error bars represent standard errors.
Figure 3. Changes in effort level

The difference between the control group and wage cut treatment is significant regarding thechanges in the effort level (t-test: t = 1.90, p = 0.06). The difference between the control groupand tax increase treatment is also significant (t-test: t = 2.42, p = 0.02). These results indicatethat the decline in real wages resulted in a lower growth of the effort level. By contrast, thedifference between the wage cut and tax increase treatments is not significant (t-test: t = 0.04,
p = 0.34). The differences in the reasons for real wage declines are shown to have no effect oneffort increases.

Result 2 (differences in effort level between first and second round): Control > Wage cut
treatment = Tax increase treatment

Based on these results, Hypothesis 1, which posits that subjects’ labor supply depends only13

on real wages, is supported. However, there is no support for the net wage illusion (Hypothesis2), in which the effort level is determined by gross wages, or for tax aversion (Hypothesis 3),
in which the reduction in real wages due to higher taxes is averted.
Table 2 shows the results of the ordinary least squares regression analysis controlling for thecharacteristics of subjects. As treatment dummies, we control the wage cut and tax increase
treatment dummies, while the control group serves as the baseline. We also control for slider
task experience, gender (female), and graduate students using dummies. We present thecoefficients and p-values for each variable and the F-value of whether the value of thedependent variable is the same between the wage cut and tax increase treatments.

14

Table 2.
Dependent variable
Wage cut
Tax increase
Experience with slider
tasks
FemaleGraduate student

Regression analysis

Effort 1

Effort 2

Differences

(1)

(2)

(3)

2.179

-2.653-4.998*(3.352)(4.237)(2.718)2.620-3.087-5.907**(3.719)(4.535)(2.575)10.450***4.769-6.479***(3.264)(4.463)(2.479)-5.642*-3.351

2.721(3.053)(3.606)(2.423)10.679***11.314**-0.179(3.364)(4.646)(2.622)

Effort 1

0.076(0.092)

Constant
Wage cut = Tax increase
Observations
2

R

89.162***108.163***

12.200(2.989)(3.026)(8.804)F (1, 144) = 0.01

F (1, 144) = 0.01

F (1, 143) = 0.10

150

150

150

0.186

0.069

0.093

Note: “Effort 1” represents the effort level in the first round and “Effort 2” the effort level inthe second round. “Differences” represents the difference between Effort 2 and Effort 1. Robust
standard errors are clustered by subject. *, **, and *** represent significance at the 10%, 5%,
and 1% levels, respectively.

The dependent variable in the first column is the effort level in the first round. As per Figure
1, there is no difference in the effort level between the control group and wage cut or tax
increase treatments. There is also no difference in the effort level between the wage cut and tax
increase treatments. Those who had experience with a slider task had an effort level higher by
10.7 points than those who have not. The experience also caused the adaptation of the task. The
effort level is slightly lower for females and higher for graduate students (which may reflect
15

their computer skills).
The dependent variable in the second column is the effort level in the second round. The
effort level for the wage cut and tax increase treatments is lower than for the control group, but
not significantly different. There is also no significant difference in the effort level between thewage cut and tax increase treatments. Regarding the effort level in the second round, there isno difference between the effort levels of those who have had experience with a slider task inthe past and the others. The effect of learning the task disappears in the second round. Graduate
students have higher effort levels and there is no significant gender difference.
The dependent variable in the third column is the difference in the effort level between thefirst and second rounds. In this analysis, we control for the effort level in the first round.
Compared to the control group, the increase in the effort level is significantly smaller for thewage cut treatment, by 5.0 points. The increase is significantly smaller under the tax increase
treatment, by 5.9 points. However, there is no significant difference in the increase in the effort
level between the wage cut and tax increase treatments. The increase in the effort level issmaller for those with slider task experience, indicating a convex learning curve. Both thefemale and graduate student dummies are not significant.
These results are robust when controlling for these new variables. In other words, Hypothesis
1 is still supported, and there is no evidence of the net wage illusion or tax aversion.

5. Discussion and Conclusions
This study examines whether a drop in net wages differently impacts on labor supply
according to whether wages are cut or taxes increased. Recent studies show that, when the
gross wage is different but the net wage is the same due to taxes, a higher gross wage leads toa higher labor supply, which is called the net wage illusion (Fochmann et al. 2013). Studies
also show that, even if the net wage is the same, tax introduction has a greater impact on
reducing the labor supply than lowering wages, which is called tax aversion (Kessler and16

Norton 2016). We conducted complementary laboratory experiments to test these opposite
behavioral economics hypotheses.
In our experiment, there was no difference in the level of the labor supply when wages were
cut or taxes were increased compared to the control group, for which real wages remained
unchanged. Compared to the control group, the increase in labor supply was smaller whenwages were cut or taxes increased. There was no difference between the impacts of a wage cut
or a tax increase on the extent of the increase in the labor supply. Therefore, neither the net
wage illusion nor tax aversion were observed in our experiment.
The lack of differences between treatments regarding the effort level may be due to the factthat a slider task does not respond to incentives for between-subject comparisons. Araujo et al.
(2016) showed that, even if there is a 1500% difference in incentives, productivity differs only
by 5%. In our experiment, the difference in incentives was 50%, so we did not observe an
impact on productivity. However, the analysis of the difference in the effort level between thefirst and second rounds captured within-subject changes and allowed for a comparison between
subjects. Specifically, the increase in the effort level was around 30% lower when the incentive
was reduced by 50%. Our results suggest that the slider task is less responsive to incentives
between subjects, but more responsive to changes in incentives within subjects.
One possible reason for the absence of the net wage illusion is that participants were more
likely to notice the changes in real wages due to wage cuts and tax increases during the session.
By contrast, Fochmann et al. (2013) employed a between-subject design, which may have
prevented subjects from being strongly aware of the levels of nominal and real wages.
The absence of tax aversion may have been due to the fact that tax was introduced from thefirst round, so the impact of the tax increase in the second round was assessed as small. Kessler
and Norton (2016) introduced the tax only in the second round, meaning that the combined
effect of the wage reduction from the tax increase and the “surprise effect” of the tax
introduction was observed. In our study, only the effect of the wage reduction caused by the17

tax increase was observed. These results suggest that raising an existing tax has a similar impact
on the labor supply as lowering wages, whereas introducing a new tax has a stronger impact
on the labor supply than lowering wages.
This implication might be extended to the general institutional design. That is, introducing a
new system, rather than changing parameters within an existing one, could generate a greater
response. The changes in incentives caused by institutional changes will only take effect if
individuals are aware of them. Studying how people perceive institutional change could thus
have significant implications for institutional design.
There are some limitations to our experiment. First, under the wage cut treatment, the amountof compensation changed without changing the amount of tax, so the tax rate had increased.
This might be why we did not see a difference between the wage cut and tax increase treatments.
To avoid this problem, we can use an experimental design that compares wage cut to tax
increase, while keeping the tax rate constant. Second, our study did not make a directcomparison between tax introduction and its increase. To show the two are different, we could
use an experimental design that allows for the direct comparison between them. Since theexperimental results may vary depending on the experimental settings, it is necessary toconsider various experimental conditions when conducting experiments.

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Sillamaa, M.-A. (1999b), How work effort responds to wage taxation: An experimental testof a zero top marginal tax rate, Journal of Public Economics, 73, 125–134.
Swenson, C. W. (1988). Taxpayer behavior in response to taxation: an experimental analysis,
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Instruction translated to English

Instruction for the first round (common to all treatment)
As a reward for participating in this experiment, you will receive 1,200 yen. In addition, theexperiment allows you to do certain tasks. The total duration of the task is 20 minutes (10minutes x 2 times). The reward for the experiment will be determined based on the performanceof the task. You will do the task for 10 minutes after this explanation, and then do the task for
another 10 minutes after the additional explanation. Please fill out a questionnaire after thetasks.

The task you will be doing this time is the “Slider Task”. For this task, 48 sliders will appear
on your computer screen, as shown in the figure on the next page5, so adjust as many sliders as
possible to show a number of 50.

Initially each slider shows a number of 0, and each slider can be moved up to a maximum of anumber of 100. The number of each slider is displayed to the right of the slider. Use the mouseto move each slider as you like (do not use the keyboard). You can readjust the position of theslider as many times as you like. There are five slider screens in all. Press "Next" at the top
right to move to the next screen. Move to the previous screen by "Previous". It doesn’t matter
which slider on any screen you move.

Your point in this task will be the number of sliders that show 50 at the end of 10 minutes.

You will do the task twice in total. The reward for the first round will be explained in the next

5

This figure is same as Figure 1.
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paragraph, and the reward for the second round will be explained before you start the second
round.

For the first task, there will be no “unemployment” for not being able to perform the task6. thereward for the first task is [5 yen per point]. However, there will be a tax on the reward for thisexperiment. The tax is [1 yen per point]. This tax will be returned to the experimenter to be
used for future experiments. No unemployment insurance premiums (unemployment insurance
premiums are those returned to the experimenter to be used for unemployment benefits forexperiment participants who become unemployed in future experiments) will be paid for thisexperiment. After the experiment, you will be paid after taxes and unemployment insurance
premiums are deducted.

During the 10-minute task, you are allowed to stop working and take a break. You can also use
the Internet. To turn the screen into a web browser, press the "Alt" key and the "Tab" key. You
can return to the original screen by pressing “Alt” key and “Tab” again. If you have any
questions, please raise your hand and call a staff member.

Instruction for the second roundThe second round, as the first round, you will do the slider task for 10 minutes, during whichtime you may stop and take a break. You can also use the Internet. To turn the screen into a web
browser, press the “Alt” key and the “Tab” key. You can return to the original screen by pressing
the “Alt” key and “Tab” again. If you have any questions, please raise your hand and call astaff member.

6This “unemployment” is not occurred in all treatments and rounds reported in this paper. As part of alarger project, we also varied the existence of unemployment and unemployment insurance. We findsmaller effects of them probably due to the fact that the settings are too complex for the subjects tounderstand.
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There will be no “unemployment” for not being able to do the task on the second task, and thereward for the second task will be [5 yen per point] (replace this amount to [3 yen per point]
in Wage cut treatment). However, there will be a tax on the reward for this experiment. The tax
is [1 yen per point] (replace this amount to [3 yen per point] in Tax increase treatment). Thistax will be returned to the experimenter to be used for future experiments. No unemployment
insurance premiums (unemployment insurance premiums are those returned to theexperimenter to be used for unemployment benefits for experiment participants who become
unemployed in future experiments) will be paid for this experiment. After the experiment, youwill be paid after taxes and unemployment insurance premiums are deducted.

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