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The effect of part-time work on wages: evidence from the Social Security rules

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  • Daniel Aaronson
  • Eric French

Abstract

This paper presents estimates of the part-time wage effect. It also shows that failure to account for the part-time wage effect leads to a downward biased estimate of labor supply elasticities of interest. Using three different datasets, we show that both work hours and wages drop sharply at ages 62 and 65. The Social Security rules produce strong incentives to reduce work hours at these ages. We present evidence that these sharp drops in work hours cause a drop in wages for men, although we find little evidence for a similar effect among women. Estimates indicate that, holding all else equal, cutting the workweek from 40 to 20 hours results in roughly a 25 percent wage penalty for male workers at these older ages. Given these estimates, the labor supply response to a tax change, for example, is downward biased by about 26 percent.

Suggested Citation

  • Daniel Aaronson & Eric French, 2001. "The effect of part-time work on wages: evidence from the Social Security rules," Working Paper Series WP-01-20, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-01-20
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    References listed on IDEAS

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    Keywords

    Wages ; Social security ; Labor supply;

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