Does the Wage Tax System Cause Budget Deficits A Macro-Economic Experiment

In this paper we investigate experimentallythe economic functioning of a wage taxsystem for financing unemployment benefits in aninternational economy, in particular inreaction to budget deficits and taxadjustment. Our results support the hypothesisthat due to out-of-equilibrium priceuncertainty producers are reluctant toemploy inputs. We also observe a downward pressureon wages exacerbated by an over-supply of labor by consumers. Theseobservations can explain the budgetdeficits found. Furthermore, we find that taxadjustments in order to facilitate abalancing of the budget has strong adverse effects onunemployment and real GDP.