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 OECD’s 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 the least.

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 Zealand.