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An Experimental Investigation of Wage Taxation and Unemployment in Closed and Open Economies

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  • Arno Riedl

    ()

  • Frans van Winden

    ()
    (University of Amsterdam)

Abstract

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 the following. (i) There is clear evidence of a vicious circle in the dynamic interaction between the wage tax and unemployment. (ii) Employment is boosted by budget deficits but subsequent tax rate adjustments to balance the budget lead to employment levels substantially lower than theoretically predicted. (iii) A sales risk for producers due to price uncertainty on output markets appears to cause a downward pressure on factor employment. For labor the wage tax exacerbates this adverse effect. This discussion paper resulted in a publication in the European Economic Review .(51(4) 871-900.)

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 00-112/1.

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Date of creation: 00 0000
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Handle: RePEc:dgr:uvatin:20000112

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Keywords: Experiments; international economics; wage taxation; unemployment;

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