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An experimental investigation of wage taxation and unemployment in closed and open economies

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  • Riedl, Arno
  • van Winden, Frans

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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  • Riedl, Arno & van Winden, Frans, 2007. "An experimental investigation of wage taxation and unemployment in closed and open economies," European Economic Review, Elsevier, vol. 51(4), pages 871-900, May.
    • Handle: RePEc:eee:eecrev:v:51:y:2007:i:4:p:871-900
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    6. Riedl, Arno & van Winden, Frans, 2012. "Input versus output taxation in an experimental international economy," European Economic Review, Elsevier, vol. 56(2), pages 216-232.
    7. Sailesh Gunessee, 2010. "Strategic Tax Competition: An Experimental Study," Public Finance Review, , vol. 38(2), pages 217-243, March.
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    9. Werner, Peter & Riedl, Arno, 2018. "The role of experiments for policy design," Research Memorandum 022, Maastricht University, Graduate School of Business and Economics (GSBE).
    10. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 3, pages 229-330, Elsevier.
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    12. John Duffy, 2008. "Macroeconomics: A Survey of Laboratory Research," Working Paper 334, Department of Economics, University of Pittsburgh, revised Jun 2014.
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    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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