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Earnings Adjustment Frictions: Evidence From Social Security Earnings Test

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Listed:
  • Alexander M. Gelber
  • Damon Jones
  • Daniel W. Sacks

Abstract

We study frictions in adjusting earnings to changes in the Social Security Annual Earnings Test (AET) using a panel of Social Security Administration microdata on one percent of the U.S. population from 1961 to 2006. Individuals continue to "bunch" at the convex kink the AET creates even when they are no longer subject to the AET, consistent with the existence of earnings adjustment frictions in the U.S. We develop a novel 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 bene.t reduction rate, and we estimate in a baseline case that the earnings elasticity with respect to the implicit net-of-tax share is 0.23, and the .xed cost of adjustment is $152.08.

Suggested Citation

  • Alexander M. Gelber & Damon Jones & Daniel W. Sacks, 2013. "Earnings Adjustment Frictions: Evidence From Social Security Earnings Test," Working Papers 13-50, Center for Economic Studies, U.S. Census Bureau.
  • Handle: RePEc:cen:wpaper:13-50
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    File URL: https://www2.census.gov/ces/wp/2013/CES-WP-13-50.pdf
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    References listed on IDEAS

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    Cited by:

    1. Abby Alpert & David Powell, 2014. "Estimating Intensive and Extensive Tax Responsiveness Do Older Workers Respond to Income Taxes?," Working Papers WR-987-1, RAND Corporation.
    2. Weber, Andrea & Manoli, Dayanand, 2016. "The Effects of Increasing the Early Retirement Age on Employment of Older Workers," Annual Conference 2016 (Augsburg): Demographic Change 145549, Verein für Socialpolitik / German Economic Association.
    3. Tazhitdinova, Alisa, 2015. "Adjust Me if I Can’t: The Effect of Firm Incentives on Labor Supply Responses to Taxes," MPRA Paper 81611, University Library of Munich, Germany, revised 2017.
    4. Jakob Egholt Søgaard, 2014. "Labor Supply and Optimization Frictions: Evidence from the Danish student labor market," EPRU Working Paper Series 2014-02, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    5. Dennis Fredriksen & Christian N. Brinch & Ola L. Vestad, 2017. "Life expectancy and claiming behavior in a flexible pension system," Discussion Papers 859, Statistics Norway, Research Department.
    6. repec:spr:jopoec:v:31:y:2018:i:1:d:10.1007_s00148-017-0664-x is not listed on IDEAS
    7. Schächtele, Simeon, 2016. "The Importance of Deductions in Response to the Personal Income Tax: Bunching Evidence from Germany," Annual Conference 2016 (Augsburg): Demographic Change 145748, Verein für Socialpolitik / German Economic Association.
    8. repec:aea:aejpol:v:9:y:2017:i:4:p:395-421 is not listed on IDEAS
    9. repec:kap:itaxpf:v:24:y:2017:i:3:d:10.1007_s10797-016-9427-y is not listed on IDEAS
    10. Alpert, Abby & Powell, David, 2014. "Estimating Intensive and Extensive Tax Responsiveness: Do Older Workers Respond to Income Taxes?," Working Papers 987-1, RAND Corporation.
    11. repec:eee:hapoch:v1_457 is not listed on IDEAS
    12. Zhiyang Jia & Trine E. Vattø, 2016. "The path of labor supply adjustment. Sources of lagged responses to tax-benefit reforms," Discussion Papers 854, Statistics Norway, Research Department.

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