Iceland's Natural Experiment in Supply-Side Economics

37 Pages Posted: 8 May 2001

See all articles by Marco Bianchi

Marco Bianchi

Citibank, N.A. - Asset Management Group, London; Bank of England

Bjorn R. Gudmundsson

National Economic Institute of Iceland

Gylfi Zoega

University of Iceland; University of London - Birkbeck College; Centre for Economic Policy Research (CEPR)

Date Written: January 2000

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 labor-supply response of this change and find that total labor 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 labor 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: Labor supply, supply-side economics

JEL Classification: E65, J22

Suggested Citation

Bianchi, Marco and Gudmundsson, Bjorn R. and Zoega, Gylfi, Iceland's Natural Experiment in Supply-Side Economics (January 2000). Available at SSRN: https://ssrn.com/abstract=268859

Marco Bianchi (Contact Author)

Citibank, N.A. - Asset Management Group, London ( email )

Cottons Centre
Hays Lane
London, SE1 2QT
United Kingdom

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

Bjorn R. Gudmundsson

National Economic Institute of Iceland ( email )

Kalkofnsvegur 1
150 Reykjavik
ICELAND
+354 569 9529 (Phone)

Gylfi Zoega

University of Iceland ( email )

IS-101 Reykjavik
Iceland

University of London - Birkbeck College ( email )

Malet Street
London, WC1E 7HX
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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