American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Labor Supply Responses and Adjustment Frictions: A Tax-Free Year in Iceland
American Economic Journal: Economic Policy
(pp. 30–71)
Abstract
Labor income earned in Iceland in 1987 went untaxed. I use this episode to study labor supply responses to temporary wage changes. Using a population-wide dataset of earnings and working time and two identification strategies, I estimate intensive and extensive margin Frisch elasticities of 0.4 and 0.09, respectively. Workers with the ability to adjust drive these average responses: extensive margin by young and close-to-retirement cohorts and intensive margin responses by workers in temporally flexible jobs, though secondary jobs contribute to one-tenth of the response. The results suggest that adjustment frictions may similarly explain differences in elasticities within and across countries.Citation
Sigurdsson, Jósef. 2025. "Labor Supply Responses and Adjustment Frictions: A Tax-Free Year in Iceland." American Economic Journal: Economic Policy 17 (4): 30–71. DOI: 10.1257/pol.20220386Additional Materials
JEL Classification
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- H31 Fiscal Policies and Behavior of Economic Agents: Household
- J22 Time Allocation and Labor Supply