The Non‐Equivalence of Labour Market Taxes: A Real‐Effort Experiment

Under full rationality, a labour market tax levied on employers and a corresponding income tax levied on employees are equivalent. With boundedly rational agents, this equivalence is no longer obvious. In a real‐effort experiment, we study the effects of these taxes on preferences concerning the size of the public sector, subjective well‐being, labour supply and on‐the‐job performance. Our findings suggest that employer‐side taxes induce preferences for a larger public sector. Subjective well‐being is higher under employer‐side taxes while labour supply is lower, at least at the extensive margin. We discuss three mechanisms that may underlie these results.