Working Paper: CEPR ID: DP2367
Authors: Marco Bianchi; Bjorn R. Gudmundsson; Gylfi Zoega
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: supply-side economics; labor supply
JEL Codes: E65; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax reform (H29) | Increase in total labor supply (J20) |
| Tax reform (H29) | Increase in weeks supplied by individuals already in labor market (J22) |
| Tax reform (H29) | Decline in labor supply due to entry and exit effects (J29) |
| Tax reform (H29) | Increase in employment rate (J68) |
| Tax reform (H29) | Increase in real GDP (E20) |
| After-tax wage increase (J39) | Elasticity of weeks worked for men (J22) |
| After-tax wage increase (J39) | Elasticity of weeks worked for women (J22) |
| Tax reform (H29) | Heterogeneous response in labor supply (J49) |