Labour Cost and Taxing Wages
According to the Statistics Iceland, the total labour costs in Iceland are much higher than
the average cost in the EU, especially in the economic sector of construction. The Statistics Iceland indicates
that this might be caused by long working hours and the high cost of living in Iceland.
However, the Icelandic workers keep a greater part of their wages than the workers in the EU.
The OECDs annual compendium of tax data for 2006 shows little change in levels of
taxation on wage earners in different OECD countries, with Turkey, Poland and France levying the most on a
single-earner married couple with two children on average earnings and Ireland, New Zealand and Iceland levying
Taxing Wages compares the shares of employee earnings taken by governments
in OECD countries through taxation by calculating what it calls the tax wedge, the difference between
labour costs to the employer and the net take-home pay of the employee, including any cash benefits from
government welfare programmers. The overall cost of employment is a key factor in companies hiring
decisions, and thus, indirectly, a factor affecting unemployment trends. In other words, the higher the
tax wedge is the higher unemployment is.
At the top end of the scale, single individuals without children earning the average wage in
services and manufacturing industries faced a tax wedge in 2006 of 55.4% of the cost of their labour to their
employers in Belgium, 52.5% in Germany and 50.2% in France. In all three of these countries, the average
employee takes home less than half of the total cost of employing them that is born by their employers. In
Iceland, a single person without children earning the average wage faced a tax wedge of 28.6%. The unweighted
average is 37.7% for OECD and 42.6% EU-15.
For a one-earner married couple with two children on average earnings, by contrast, the tax
wedge for the same countries as above is 42.0% in France, 40.1 for Belgium and 36.2 for Germany. In Iceland
the tax wedge is 10.4%. Only Ireland and New Zealand are lower, 2.3% in Ireland and 2.6% in New