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Does the Wage Tax System cause Budget Deficits?

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  • Arno Riedl

    ()

  • Frans A.A.M. van Winden

    ()
    (University of Amsterdam)

Abstract

This discussion paper led to a publication in 'Public Choice' 109(3-4) 371-94. In this paper we investigate experimentally the functioning of a wage tax financed unemployment benefit system on the development of the budget deficit, unemployment, and some other indicators of economic performance in an international economy. We find support for the hypothesis that out-of-equilibrium price uncertainty affects the behavior of economic agents. Dueto uncertainty about prices risk-averse producers are hypothesized to be reluctant to employ inputs with the additional effect of too low wages and too high output prices. Our results support this hypothesis of a `risk-compensated price-mechanism'. We also find that the downward pressure on wages is exacerbated by an over-supply of labor by consumers. These observationscan explain the budget deficits we observe in the laboratory economies. Furthermore, we find that tax adjustments in order to facilitate a balancing of the budget has strong adverse effects on unemployment and real GDP.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 00-094/1.

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Date of creation: 10 Nov 2000
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Handle: RePEc:dgr:uvatin:20000094

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Related research

Keywords: Budget deficit; experiment; price uncertainty; unemployment benefit; wage tax;

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References

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  1. Arno Riedl & Frans van Winden, 0000. "An Experimental Investigation of Wage Taxation and Unemployment in Closed and Open Economies," Tinbergen Institute Discussion Papers, Tinbergen Institute 00-112/1, Tinbergen Institute.
  2. Hartman, Richard, 1976. "Factor Demand with Output Price Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 66(4), pages 675-81, September.
  3. Robert J. Barro, 1988. "The Ricardian Approach to Budget Deficits," Working Papers, Queen's University, Department of Economics 728, Queen's University, Department of Economics.
  4. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  5. P. B. Sørensen, 1997. "Public finance solutions to the European unemployment problem?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 12(25), pages 221-264, October.
  6. Batra, Raveendra N & Ullah, Aman, 1974. "Competitive Firm and the Theory of Input Demand under Price Uncertainty," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(3), pages 537-48, May/June.
  7. Alberto Alesina & Roberto Perotti, 1994. "The Political Economy of Budget Deficits," NBER Working Papers 4637, National Bureau of Economic Research, Inc.
  8. Kisan Gunjal & Benoit Legault, 1995. "Risk Preferences of Dairy and Hog Producer in Quebec," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 43(1), pages 23-35, 03.
  9. Noussair, C.N. & Plott, C. & Riezman, R., 1995. "An experimental investigation of the patterns of international trade," Open Access publications from Tilburg University urn:nbn:nl:ui:12-387775, Tilburg University.
  10. Hartman, Richard, 1975. "Competitive Firm and the Theory of Input Demand under Price Uncertainty: Comment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(6), pages 1289-90, December.
  11. Yellen, Janet L, 1989. "Symposium on the Budget Deficit," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 3(2), pages 17-21, Spring.
  12. Plott, Charles R. & Gray, Peter, 1990. "The multiple unit double auction," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 13(2), pages 245-258, March.
  13. Bernheim, B Douglas, 1989. "A Neoclassical Perspective on Budget Deficits," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 3(2), pages 55-72, Spring.
  14. Alberto Alesina & Roberto Perotti, 1995. "The Political Economy of Budget Deficits," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 1-31, March.
  15. Kenen,Peter B., 2000. "The International Economy," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521644358.
  16. Holthausen, Duncan M, 1976. "Input Choices and Uncertain Demand," American Economic Review, American Economic Association, American Economic Association, vol. 66(1), pages 94-103, March.
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Cited by:
  1. Arno Riedl, 2009. "Behavioral and Experimental Economics Can Inform Public Policy: Some Thoughts," CESifo Working Paper Series 2902, CESifo Group Munich.
  2. Bernd Irlenbusch & Matthias Sutter, 2006. "An experimental analysis of voting in the Stability and Growth Pact in the European Monetary Union," Public Choice, Springer, Springer, vol. 129(3), pages 417-434, December.
  3. Arthur J.H.C. Schram, 2002. "Experimental Public Choice," Tinbergen Institute Discussion Papers, Tinbergen Institute 02-106/1, Tinbergen Institute.

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