Earnings Adjustment Frictions: Evidence from the Social Security Earnings Test

Alexander Gelber (), Damon Jones and Daniel W. Sacks

Institute for Research on Labor and Employment, Working Paper Series from Institute of Industrial Relations, UC Berkeley

Abstract: We study frictions in adjusting earnings in response to changes in the Social Security Annual Earnings Test (AET), using a one percent sample of earnings histories from Social Security Administration microdata from 1983 to 1999. We introduce a novel method for documenting adjustment frictions: individuals continue to ìbunchî at the convex kink the AET creates even when they are no longer subject to the AET. We develop a framework for estimating an earnings elasticity and an adjustment cost using information on the amount of bunching at kinks before and after policy changes in earnings incentives around the kinks. We apply this method in settings in which individuals face changes in the AET beneÖt reduction rate, and we estimate in a baseline case that the earnings elasticity with respect to the implicit net-of-tax share is 0.35, and the Öxed cost of adjustment is around $280. Our results demonstrate that the short-run impact of changes in the e§ective marginal tax rate can be substantially attenuated.

Keywords: Social and Behavioral Sciences; Social Security; Earnings; AET; Annual Earnings (search for similar items in EconPapers)
Date: 2016-08-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.escholarship.org/uc/item/2f86m1df.pdf;origin=repeccitec (application/pdf)

Related works:
Working Paper: EARNINGS ADJUSTMENT FRICTIONS: EVIDENCE FROM SOCIAL SECURITY EARNINGS TEST (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cdl:indrel:qt2f86m1df

Access Statistics for this paper

More papers in Institute for Research on Labor and Employment, Working Paper Series from Institute of Industrial Relations, UC Berkeley Contact information at EDIRC.
Bibliographic data for series maintained by Lisa Schiff ().