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Discussion Paper Details

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Title: Iceland's Natural Experiment in Supply-Side Economics

Author(s): Marco Bianchi, Björn R Gudmundsson and Gylfi Zoega

Publication Date: January 2000

Keyword(s): Labour Supply and Supply-Side Economics

Programme Area(s): Labour Economics

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.

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Bibliographic Reference

Bianchi, M, Gudmundsson, B and Zoega, G. 2000. 'Iceland's Natural Experiment in Supply-Side Economics'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2367