Labor Supply Responses and Adjustment Frictions: A Tax-Free Year in Iceland
Year: 2018
Type: article
Study design: Observational Study
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. (JEL H24, H31, J22)
DOI: 10.1257/pol.20220386
Author: Jósef Sigurdsson
Institutions: Stockholm University, Centre for Economic Policy Research
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4415659223