Riedl, A. and van Winden, F.A.A.M. (2001). Does the wage tax system cause budget deficts? A macro-economic experiment Public Choice, 109:371--394.

Affiliated author

Frans van Winden
Publication year

2001

Journal

Public Choice

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In this paper we investigate experimentally the economic functioning of a wage tax financed unemployment benefit system in an international economy, in particular in reaction to budget deficits and tax adjustment. Our results support the hypothesis that due to out-of-equilibrium price uncertainty producers are reluctant to employ inputs. We also observe a downward pressure on wages exacerbated by an over-supply of labor by consumers. These observations can explain the budget deficits found. Furthermore, we find that tax adjustments in order to facilitate a balancing of the budget has strong adverse effects on unemployment and real GDP.