Iceland's Natural Experiment in Supply-Side Economics

Gylfi Zoega, Marco Bianchi and Gudmundsson, Björn R

No 2367, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The move to a pay-as-you-earn income tax system in Iceland in 1987-1988 made income earned in 1987 tax-free. Using a sample of 9,274 individuals for the years 1986, 1987 and 1988, we calculate the labour-supply response of this change and find that total labour supply rose by 6.7% in 1987 over the average of 1986 and 1988 when we correct for entry in 1988. This consists of an 8.6% increase in weeks supplied by those already in the labour market in 1986 and a 1.9% decline due to entry/exit. The elasticity of weeks worked to the rise in after-tax wages was 0.41 for men and 0.11 for women. While the participation rate of women increased somewhat in our sample, participation by men fell.

Keywords: Labour supply; Supply-side economics (search for similar items in EconPapers)
JEL-codes: E65 J22 (search for similar items in EconPapers)
Date: 2000-01
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