We investigate experimentally the economic effects of wage taxation to finance unemployment benefits for a closed economy and an international economy. The main findings are: (i) There is clear evidence for a vicious circle in the dynamic interaction between the wage tax and unemployment. (ii) In the short run employment is boosted by budget deficits. However, subsequent tax rate adjustments in order to balance the budget lead to employment levels substantially lower than theoretically predicted. (iii) There exists a downward pressure on factor employment caused by a sales risk for producers. For labor the wage tax exacerbates this effect.
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Find related papers by JEL classification: C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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