Labor Supply Responses and Adjustment Frictions: A Tax-Free Year in Iceland

Jósef Sigurdsson

American Economic Journal: Economic Policy, 2025, vol. 17, issue 4, 30-71

Abstract: Labor income earned in Iceland in 1987 went untaxed. I use this episode to study labor supply responses to temporary wage changes. Using a population-wide dataset of earnings and working time and two identification strategies, I estimate intensive and extensive margin Frisch elasticities of 0.4 and 0.09, respectively. Workers with the ability to adjust drive these average responses: extensive margin by young and close-to-retirement cohorts and intensive margin responses by workers in temporally flexible jobs, though secondary jobs contribute to one-tenth of the response. The results suggest that adjustment frictions may similarly explain differences in elasticities within and across countries.

JEL-codes: H24 H31 J22 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1257/pol.20220386

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