Does the wage tax system cause budget deficits? A macro-economic experiment

In this paper we investigate experimentally the economic functioning of a w age tax system for financing unemployment benefits in an international econ omy, in particular in reaction to budget deficits and tax adjustment. Our r esults support the hypothesis that due to out-of-equilibrium price uncertai nty producers are reluctant to employ inputs. We also observe a downward pr essure on wages exacerbated by an over-supply of labor by consumers. These observations can explain the budget deficits found. Furthermore, we find th at tax adjustments in order to facilitate a balancing of the budget has str ong adverse effects on unemployment and real GDP.