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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.
