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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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  1. 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.
  2. 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).
  3. 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.
  4. Anders Frederiksen & Bo E. Honoré & Luojia Hu, 2006. "Discrete Time Duration Models with Group-level Heterogeneity," Discussion Papers 05-008, Stanford Institute for Economic Policy Research.
  5. Costas Meghir & Luigi Pistaferri, 2001. "Income variance dynamics and heterogenity," IFS Working Papers W01/07, Institute for Fiscal Studies.
  6. Robert Gibbons & Michael Waldman, 2006. "Enriching a Theory of Wage and Promotion Dynamics inside Firms," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 59-108, January.
  7. Robert Gibbons & Michael Waldman, 1999. "A Theory of Wage and Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1321-1358.
  8. Tor Eriksson & Niels Westergaard-Nielsen, 2007. "Wage and Labor Mobility in Denmark, 1980-2000," NBER Working Papers 13064, National Bureau of Economic Research, Inc.
  9. Michael Gibbs & Wallace Hendricks, 2004. "Do formal salary systems really matter?," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 58(1), pages 71-93, October.
  10. Christian Belzil & Michael Bognanno, 2008. "Promotions, Demotions, Halo Effects, and the Earnings Dynamics of American Executives," Journal of Labor Economics, University of Chicago Press, vol. 26(2), pages 287-310, 04.
  11. 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.
  12. 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.
  13. McCue, Kristin, 1996. "Promotions and Wage Growth," Journal of Labor Economics, University of Chicago Press, vol. 14(2), pages 175-209, April.
  14. Moshe Buchinsky & Denis Fougère & Francis Kramarz & Rusty Tchernis, 2008. "Interfirm Mobility, Wages, and the Returns to Seniority and Experience in the U.S," Caepr Working Papers 2008-006, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  15. Jean-Marc Robin & Francois Fontaine & Fabien Postel-Vinay & Jesper Bagger, 2011. "A Feasible Equilibrium Search Model of Individual Wage Dynamics with Experience Accumulation," 2011 Meeting Papers 278, Society for Economic Dynamics.
  16. 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.
  17. Frederiksen, Anders, 2006. "Gender Differences in Job Separation Rates and Employment Stability: New Evidence from Employer-Employee Data," IZA Discussion Papers 2147, Institute for the Study of Labor (IZA).
  18. repec:oup:restud:v:62:y:1995:i:2:p:315-39 is not listed on IDEAS
  19. 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.
  20. 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).
  21. Gibbons, Robert & Waldman, Michael, 1999. "Careers in organizations: Theory and evidence," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 36, pages 2373-2437 Elsevier.
  22. 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, Oxford University Press, vol. 126(2), pages 749-804.
  23. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 881-919.
  24. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-45, March.
  25. Pierre-Andre Chiappori & Bernard Salanie & Julie Valentin, 1999. "Early Starters versus Late Beginners," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 731-760, August.
  26. 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.
  27. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 921-955.
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