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Iceland's Natural Experiment in Supply-Side Economics

  • Bianchi, Marco
  • Gudmundsson, Björn R
  • Zoega, Gylfi

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2367.

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Date of creation: Jan 2000
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Handle: RePEc:cpr:ceprdp:2367
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  1. Feldstein, Martin, 1986. "Supply Side Economics: Old Truths and New Claims," American Economic Review, American Economic Association, vol. 76(2), pages 26-30, May.
  2. Jerry A. Hausman, 1981. "Stochastic Problems in the Simulation of Labor Supply," NBER Working Papers 0788, National Bureau of Economic Research, Inc.
  3. Nada Eissa & Jeffrey B. Liebman, 1995. "Labor Supply Response to the Earned Income Tax Credit," NBER Working Papers 5158, National Bureau of Economic Research, Inc.
  4. Don Fullerton, 1980. "On the Possibility of an Inverse Relationship between Tax Rates and Government Revenues," NBER Working Papers 0467, National Bureau of Economic Research, Inc.
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