Iceland's Natural Experiment in Supply-Side Economics by Marco Bianchi, Bjorn R. Gudmundsson and Gylfi Zoega. Published in volume 91, issue 5, pages 1564-1579 of American Economic Review, December 2001

The negative effect of quits on the willingness of firms to provide on‐the‐job training is well documented in the theoretical literature. Here we explore the strength of this effect by solving a firm’s dynamic optimization problem where there is uncertainty about future productivity and nonzero firing costs. We find that the degree to which quit rates affect hiring depends on the ratio of firing to hiring costs. As this ratio rises, the negative effect of quits becomes less important, eventually reversing itself. We also describe how quit rates affect the firing decision. We highlight some testable implications of our analysis.

Recently, mandatory pension contributions in Iceland were increased substantially in the private sector while remaining unchanged in the public sector. Taking this as a large natural experiment, this paper studies the effects of this change on households’ voluntary saving, using comprehensive third-party reported information on income, assets, and debt for all taxpayers. Using difference-in-differences, we find that households do not reduce voluntary saving when faced with a rise in mandatory saving. Our results are supported by an event study of workers switching from the private sector to the public sector. Survey evidence suggests widespread ignorance about the pension system.