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What Do We Work For? An Anatomy of Pre- and Post-Tax Earnings Growth

  • Frederiksen, Anders


    (Aarhus University)

  • Halliday, Timothy J.


    (University of Hawaii at Manoa)

  • Koch, Alexander K.


    (Aarhus University)

Promotions and cross-firm mobility provide substantial gains in earnings – a well established finding based on gross income data. Yet, what matters for incentives is how much an individual can consume or save after taxation. We show that net and gross income growth patterns may differ substantially when a progressive tax system allows for deduction opportunities. Exploiting unique matched employer-employee data with information on tax payments and employee mobility, we find that gross income gains from promotions and cross-firm mobility do not translate into significantly higher net income growth, because employees adjust their tax-shielded consumption and savings (in particular, deductible private pension contributions and mortgage-financed housing) to maintain constant net income growth.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5298.

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Length: 25 pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:iza:izadps:dp5298
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  7. Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," NBER Working Papers 15012, National Bureau of Economic Research, Inc.
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  11. Grégory Jolivet & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "The Empirical Content of the Job Search Model: Labor Mobility and Wage Distributions in Europe and the U.S," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00308803, HAL.
  12. McCue, Kristin, 1996. "Promotions and Wage Growth," Journal of Labor Economics, University of Chicago Press, vol. 14(2), pages 175-209, April.
  13. Dohmen, Thomas & Kriechel, Ben & Pfann, Gerard A., 2003. "Monkey Bars and Ladders: The Importance of Lateral and Vertical Job Mobility in Internal Labor Market Careers," IZA Discussion Papers 867, Institute for the Study of Labor (IZA).
  14. Frederiksen, Anders & Honore, Bo E. & Hu, Luojia, 2007. "Discrete time duration models with group-level heterogeneity," Journal of Econometrics, Elsevier, vol. 141(2), pages 1014-1043, December.
  15. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2009. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," NBER Working Papers 15617, National Bureau of Economic Research, Inc.
  16. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 881-919, November.
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  19. Jesper Bager & Francois Fontaine & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "A Feasible Equilibrium Search Model of Individual Wage Dynamics with Experience Accumulation," 2006 Meeting Papers 679, Society for Economic Dynamics.
  20. Koen Caminada & Kees Goudswaard, 2008. "Revenue Effects of Tax Facilities for Pension Savings," Atlantic Economic Journal, International Atlantic Economic Society, vol. 36(2), pages 233-246, June.
  21. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2010. "Adjustment Costs, Firm Responses, and Labor Supply Elasticities: Evidence from Danish Tax Records," CAM Working Papers 2010-03, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  22. Booth, Alison L. & Francesconi, Marco & Frank, Jeff, 2003. "A sticky floors model of promotion, pay, and gender," European Economic Review, Elsevier, vol. 47(2), pages 295-322, April.
  23. Frederiksen, Anders & Halliday, Timothy J. & Koch, Alexander K., 2010. "Within- and Cross-Firm Mobility and Earnings Growth," IZA Discussion Papers 5163, Institute for the Study of Labor (IZA).
  24. James L. Medoff & Katharine G. Abraham, 1981. "Are Those Paid More Really More Productive? The Case of Experience," Journal of Human Resources, University of Wisconsin Press, vol. 16(2), pages 186-216.
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  27. Seltzer, Andrew & Merrett, David T, 2000. "Personnel Policies at the Union Bank of Australia: Evidence from the 1888-1900 Entry Cohorts," Journal of Labor Economics, University of Chicago Press, vol. 18(4), pages 573-613, October.
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