IDEAS home Printed from https://ideas.repec.org/p/diw/diwwpp/dp1489.html
   My bibliography  Save this paper

Earnings Responses to Social Security Contributions

Author

Listed:
  • Michael Neumann

Abstract

This paper exploits discontinuities induced by earnings caps for social security contributions (SSC) in Germany to analyse the effect of SSC on gross labour earnings. Empirical evidence is based on two complementary approaches utilising two administrative data sets. First, employment responses to SSC at the intensive margin are identified by a modified bunching approach that is applied to kinks in the budget set generated by the earnings caps. Second, I exploit an increase ofa regional earnings cap of health and long-term care insurance as a natural experiment. In order to analyse economic incidence a difference-in-differences approach is used to estimate the effects on gross earnings. I find employment responses to be negligible and the burden of SSC to be shared equally between employers and employees. Both results turn out to be robust and are consistent with a competitive labour market model.

Suggested Citation

  • Michael Neumann, 2015. "Earnings Responses to Social Security Contributions," Discussion Papers of DIW Berlin 1489, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1489
    as

    Download full text from publisher

    File URL: https://www.diw.de/documents/publikationen/73/diw_01.c.508087.de/dp1489.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kevin Lang, 2003. "The Effect of the Payroll Tax on Earnings: A Test of Competing Models of Wage Determination," NBER Working Papers 9537, National Bureau of Economic Research, Inc.
    2. Richard Blundell & Alan Duncan & Costas Meghir, 1998. "Estimating Labor Supply Responses Using Tax Reforms," Econometrica, Econometric Society, vol. 66(4), pages 827-862, July.
    3. Saez, Emmanuel, 2003. "The effect of marginal tax rates on income: a panel study of 'bracket creep'," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1231-1258, May.
    4. repec:iab:iabfda:201309(de is not listed on IDEAS
    5. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
    6. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2011. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 749-804.
    7. Burtless, Gary & Hausman, Jerry A, 1978. "The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiments," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1103-1130, December.
    8. 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.
    9. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 72-101, July.
    10. Skedinger, Per, 2014. "Effects of Payroll Tax Cuts for Young Workers," Working Paper Series 1031, Research Institute of Industrial Economics.
    11. Katherine Baicker & Amitabh Chandra, 2006. "The Labor Market Effects of Rising Health Insurance Premiums," Journal of Labor Economics, University of Chicago Press, vol. 24(3), pages 609-634, July.
    12. Edward C. Prescott, 2004. "Why do Americans work so much more than Europeans?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 28(Jul), pages 2-13.
    13. Laura Wichert & Ralf A. Wilke, 2012. "Which factors safeguard employment?: an analysis with misclassified German register data," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 175(1), pages 135-151, January.
    14. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-641, June.
    15. Dorner, Matthias & König, Marion & Seth, Stefan, 2011. "Stichprobe der Integrierten Arbeitsmarktbiografien. Regionalfile 1975-2008 (SIAB-R 7508)," FDZ Datenreport. Documentation on Labour Market Data 201107_de, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    16. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695, Elsevier.
    17. Alesina, Alberto & Perotti, Roberto, 1997. "The Welfare State and Competitiveness," American Economic Review, American Economic Association, vol. 87(5), pages 921-939, December.
    18. Henrike Junge, 2017. "From Gross to Net Wages in German Administrative Data Sets," Data Documentation 89, DIW Berlin, German Institute for Economic Research.
    19. Erwin Ooghe & Erik Schokkaert & Jef Flechet, 2003. "The Incidence of Social Security Contributions: An Empirical Analysis," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 30(2), pages 81-106, June.
    20. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
    21. Henrik J. Kleven & Mazhar Waseem, 2013. "Using Notches to Uncover Optimization Frictions and Structural Elasticities: Theory and Evidence from Pakistan," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(2), pages 669-723.
    22. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 48-104.
    23. Anderson, Patricia M. & Meyer, Bruce D., 2000. "The effects of the unemployment insurance payroll tax on wages, employment, claims and denials," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 81-106, October.
    24. Rudolf Kerschbamer & Georg Kirchsteiger, 2000. "Theoretically robust but empirically invalid? An experimental investigation into tax equivalence," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(3), pages 719-734.
    25. Bennmarker, Helge & Mellander, Erik & Öckert, Björn, 2009. "Do regional payroll tax reductions boost employment?," Labour Economics, Elsevier, vol. 16(5), pages 480-489, October.
    26. Müller, Kai-Uwe & Neumann, Michael, 2015. "How reliable are incidence estimates based on cross-sectional distributions? Evidence from simulations and linked employer-employee data," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112920, Verein für Socialpolitik / German Economic Association.
    27. Hamermesh, Daniel S., 1987. "The demand for labor in the long run," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 8, pages 429-471, Elsevier.
    28. A. J. Auerbach & M. Feldstein (ed.), 2002. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 4, number 4.
    29. Bernd Fitzenberger & Aderonke Osikominu & Robert Völter, 2006. "Imputation Rules to Improve the Education Variable in the IAB Employment Subsample," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 126(3), pages 405-436.
    30. Emmanuel Saez & Manos Matsaganis & Panos Tsakloglou, 2012. "Earnings Determination and Taxes: Evidence From a Cohort-Based Payroll Tax Reform in Greece," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 493-533.
    31. Michael P. Keane, 2011. "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
    32. Matthias Weber & Arthur Schram, 2017. "The Non‐equivalence of Labour Market Taxes: A Real‐effort Experiment," Economic Journal, Royal Economic Society, vol. 127(604), pages 2187-2215, September.
    33. Stephen G. Donald & Kevin Lang, 2007. "Inference with Difference-in-Differences and Other Panel Data," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 221-233, May.
    34. repec:iab:iabfda:201309 is not listed on IDEAS
    35. Ángel Melguizo & José González-Páramo, 2013. "Who bears labour taxes and social contributions? A meta-analysis approach," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 4(3), pages 247-271, August.
    36. Gert G. Wagner & Joachim R. Frick & Jürgen Schupp, 2007. "The German Socio-Economic Panel Study (SOEP) – Scope, Evolution and Enhancements," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 127(1), pages 139-169.
    37. Laura Wichert & Ralf A. Wilke, 2012. "Which factors safeguard employment?: an analysis with misclassified German register data," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 175(1), pages 135-151, January.
    38. A. J. Auerbach & M. Feldstein (ed.), 2002. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 3, number 3.
    39. Ossi Korkeamäki & Roope Uusitalo, 2009. "Employment and wage effects of a payroll-tax cut—evidence from a regional experiment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(6), pages 753-772, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jonathan Deslauriers & Benoit Dostie & Robert Gagné & Jonathan Paré, 2021. "Estimating the impacts of payroll taxes: Evidence from Canadian employer–employee tax data," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(4), pages 1609-1637, November.
    2. Müller, Kai-Uwe & Neumann, Michael, 2015. "How reliable are incidence estimates based on cross-sectional distributions? Evidence from simulations and linked employer-employee data," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112920, Verein für Socialpolitik / German Economic Association.
    3. Andrei Ionut Husman, 2018. "Taxation Of Employees In Romania In 2018. Changes And Its Results On The Country’S Economy," Oradea Journal of Business and Economics, University of Oradea, Faculty of Economics, vol. 3(special), pages 46-55, May.
    4. Antoine Bozio & Thomas Breda & Julien Grenet, 2017. "Incidence and Behavioural Response to Social Security Contributions: An Analysis of Kink Points in France," De Economist, Springer, vol. 165(2), pages 141-163, June.
    5. Nicole Bosch & Maja Micevska-Scharf, 2017. "Who Bears the Burden of Social Security Contributions in the Netherlands? Evidence from Dutch Administrative Data," De Economist, Springer, vol. 165(2), pages 205-224, June.
    6. Kai-Uwe Müller & Michael Neumann, 2017. "Who Bears the Burden of Social Security Contributions in Germany? Evidence from 35 Years of Administrative Data," De Economist, Springer, vol. 165(2), pages 165-179, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gavrilova, Evelina & Zoutman, Floris T. & Hopland, Arnt O., 2017. "How to Use One Instrument to Identify Two Elasticities," Discussion Papers 2017/2, Norwegian School of Economics, Department of Business and Management Science.
    2. Nicole Bosch, 2019. "The Incidence of Pension Contributions," CPB Discussion Paper 388.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    3. Müller, Kai-Uwe & Neumann, Michael, 2015. "How reliable are incidence estimates based on cross-sectional distributions? Evidence from simulations and linked employer-employee data," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112920, Verein für Socialpolitik / German Economic Association.
    4. Ángel Melguizo & José González-Páramo, 2013. "Who bears labour taxes and social contributions? A meta-analysis approach," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 4(3), pages 247-271, August.
    5. Nicole Bosch, 2019. "The Incidence of Pension Contributions," CPB Discussion Paper 388, CPB Netherlands Bureau for Economic Policy Analysis.
    6. Kim, Jinyoung & Kim, Seonghoon & Koh, Kanghyock, 2022. "Labor market institutions and the incidence of payroll taxation," Journal of Public Economics, Elsevier, vol. 209(C).
    7. Adam, Stuart & Phillips, David & Roantree, Barra, 2019. "35 years of reforms: A panel analysis of the incidence of, and employee and employer responses to, social security contributions in the UK," Journal of Public Economics, Elsevier, vol. 171(C), pages 29-50.
    8. Kai-Uwe Müller & Michael Neumann, 2017. "Who Bears the Burden of Social Security Contributions in Germany? Evidence from 35 Years of Administrative Data," De Economist, Springer, vol. 165(2), pages 165-179, June.
    9. Egebark, Johan & Kaunitz, Niklas, 2018. "Payroll taxes and youth labor demand," Labour Economics, Elsevier, vol. 55(C), pages 163-177.
    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. Kumar, Anil & Liang, Che-Yuan, 2020. "Estimating taxable income responses with elasticity heterogeneity," Journal of Public Economics, Elsevier, vol. 188(C).
    12. Hildegunn Ekroll Stokke, 2015. "Regional payroll tax cuts and individual wages: Heterogeneous effects across education groups," Working Paper Series 16815, Department of Economics, Norwegian University of Science and Technology.
    13. 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.
    14. Emmanuel Saez & Benjamin Schoefer & David Seim, 2019. "Payroll Taxes, Firm Behavior, and Rent Sharing: Evidence from a Young Workers' Tax Cut in Sweden," American Economic Review, American Economic Association, vol. 109(5), pages 1717-1763, May.
    15. Lundberg, Jacob, 2017. "Analyzing tax reforms using the Swedish Labour Income Microsimulation Model," Working Paper Series 2017:12, Uppsala University, Department of Economics.
    16. Erich Battistin & Agar Brugiavini & Enrico Rettore & Guglielmo Weber, 2009. "The Retirement Consumption Puzzle: Evidence from a Regression Discontinuity Approach," American Economic Review, American Economic Association, vol. 99(5), pages 2209-2226, December.
    17. Ku, Hyejin & Schönberg, Uta & Schreiner, Ragnhild C., 2020. "Do place-based tax incentives create jobs?," Journal of Public Economics, Elsevier, vol. 191(C).
    18. Stuart Adam & James Browne & David Phillips & Barra Roantree, 2021. "Frictions and taxpayer responses: evidence from bunching at personal tax thresholds," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(3), pages 612-653, June.
    19. Canice Prendergast, 2015. "The Empirical Content of Pay-for-Performance," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 31(2), pages 242-261.
    20. Abby Alpert & David Powell, 2020. "Estimating Intensive And Extensive Tax Responsiveness," Economic Inquiry, Western Economic Association International, vol. 58(4), pages 1855-1873, October.

    More about this item

    Keywords

    Social security contributions; tax incidence; labour supply elasticities; labour demand elasticities; bunching;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:diw:diwwpp:dp1489. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bibliothek (email available below). General contact details of provider: https://edirc.repec.org/data/diwbede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.