Reports 2012/30

Immigrant Labour Supply

Distributional and Effeciency Impacts of Tax Reforms

The effects of a wage increase on labour supply, defined as the number of hours worked, changed from being positive to being negative over the period 1979–2006, i.e. while a wage increase gave an increase in overall labour supply earlier, it will now lead to a drop in labour supply.

The aggregate wage elasticity for the Norwegian labour force fell from 0.12 in 1994 to -0.08 in 2006. This implies that the positive overall substitution effect no longer dominates the negative overall income effect. Previous studies have shown positive but declining wage elasticities over the period 1979–1994.

The immigrant wage elasticities are remarkably similar to elasticities for the population at large. The total wage elasticities for immigrants from Asia, Africa and South-America, Eastern Europe and other OECD countries are -0.09, -0.09 and -0.05, which along with the total wage elasticity for the population at large of - 0.08, correspond to an overall wage elasticity of -0.08 for the Norwegian labour force in 2006. This implies that labour supply in terms of offered hours of work would decrease by 0.08 percent as a result of an hourly wage increase of 1 percent for all available jobs.

As in previous studies using Norwegian data for the years 1979, 1986 and 1994, we find that the wage elasticities for individuals with low income (and low working hours) are much stronger than for individuals with high income (and high working hours). This is partly because households with low incomes have the greatest potential to increase labour supply.

The introduction of an in-work tax credit at 20 percent will increase employment and working hours for persons/households with low income, and reduce working hours for persons/households with high income. The overall effect on labour supply is thus negative. Income inequality measured by the Gini coefficient would fall by about 4 percent. This is due to an increase in the after-tax income for persons/ households with low and medium incomes and a reduction in the after-tax income of the richest persons/households. However, the richest persons/households would have a significant increase in leisure.

The introduction of a flat income tax at 28 percent will help to maintain tax revenue and increase labour supply by about 2 percent. However, income inequality measured by the Gini coefficient will increase by about 10 percent. Even though the after-tax income for the poor household will increase, this will be offset by a significant increase in the after-tax income of the richest and virtually unchanged incomes in the central parts of the distribution.

The introduction of a guaranteed minimum income equal to the minimum benefit levels in the National Insurance Scheme will lead to a significant reduction in the labour supply for all groups, as well as a 26 percent reduction in the tax revenue and significant increase in income inequality.

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