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The Speed of Earnings Responses to Taxation and the Role of Firm Labor Demand

Author

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  • Matthew Gudgeon
  • Simon Trenkle

Abstract

This paper studies the speed at which workers’ pretax earnings respond to tax changes along the intensive margin. We do so in the context of Germany, where a large notch in the tax schedule induces sharp bunching in the earnings distribution. We analyze earnings responses to two policy reforms that shift this notch outward and find clear evidence that frictions delay the earnings responses of more than 38% of workers. We propose that heterogeneity in firm labor demand plays a key role in generating the observed differences in the speed of workers’ earnings responses and provide supporting evidence.

Suggested Citation

  • Matthew Gudgeon & Simon Trenkle, 2024. "The Speed of Earnings Responses to Taxation and the Role of Firm Labor Demand," Journal of Labor Economics, University of Chicago Press, vol. 42(3), pages 793-835.
    • Handle: RePEc:ucp:jlabec:doi:10.1086/723831
    DOI: 10.1086/723831
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    Cited by:

    1. Anna Herget & Regina T. Riphahn, 2025. "Phasing out payroll tax subsidies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 32(5), pages 1501-1531, October.
    2. Kunaschk, Max, 2024. "The effects of minimum wages on employment and prices—Evidence from the hairdressing sector," Labour Economics, Elsevier, vol. 88(C).
    3. Balgova, Maria & Illing, Hannah, 2024. "The Labor Market Costs of Job Displacement by Migrant Status," IZA Discussion Papers 17496, IZA Network @ LISER.
    4. Hannah Illing & Johannes Schmieder & Simon Trenkle, 2024. "The Gender Gap in Earnings Losses After Job Displacement," Journal of the European Economic Association, European Economic Association, vol. 22(5), pages 2108-2147.
    5. Moritz Drechsel‐Grau & Andreas Peichl & Kai D. Schmid & Johannes F. Schmieder & Hannes Walz & Stefanie Wolter, 2022. "Inequality and income dynamics in Germany," Quantitative Economics, Econometric Society, vol. 13(4), pages 1593-1635, November.
    6. Adam M. Lavecchia & James Stutely, 2025. "Earnings Responses to Social Security Contributions: Evidence from Older Workers in Canada," Department of Economics Working Papers 2025-07, McMaster University.
    7. Hannah Illing & Hanna Schwank & Linh T. Tô, 2024. "Hiring and the Dynamics of the Gender Gap," ECONtribute Discussion Papers Series 339, University of Bonn and University of Cologne, Germany.
    8. Gabriela Galassi, 2021. "Labor Demand Response to Labor Supply Incentives: Lessons from the German Mini-Job Reform," Staff Working Papers 21-15, Bank of Canada.
    9. Maria Balgova & Hannah Illing, 2024. "The labour market costs of job displacement by migrant status," Bank of England working papers 1099, Bank of England.
    10. Galassi, Gabriela, 2021. "Labor Demand Response to Labor Supply Incentives: Lessons from the German Mini-Job Reform," IZA Discussion Papers 14248, IZA Network @ LISER.

    More about this item

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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