The Norwegian tax holiday: Salience, labor supply responses, and frictions

Abstract

An emerging consensus is that the Frisch elasticity of labor supply is small. This may reflect a lack of salience, inelastic preferences, or prevalence of frictions. Studying survey data collected during a tax holiday in Norway, when earnings were untaxed during a transition between tax systems, I report three findings. First, 80 per cent of adults were aware of the tax holiday. Second, one fifth of adults responded by working more. Third, frictions in adjusting working hours or nonworking time appear to be the reason for a majority of nonresponses. The findings support the long-held notion that labor supply choices are constrained.