Estimating Earnings Adjustment Frictions: Method and Evidence from the Social Security Earnings Test

Gelber, Alexander M.; Jones, Damon; Sacks, Daniel W.

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Estimating Earnings Adjustment Frictions: Method and Evidence from the Social Security Earnings Test

NBER Working Paper No. w19491

73 Pages Posted: 5 Oct 2013 Last revised: 5 Apr 2023

See all articles by Alexander M. Gelber

Alexander M. Gelber

Wharton School, University of Pennsylvania; National Bureau of Economic Research

Damon Jones

University of Chicago - Harris School of Public Policy

Daniel W. Sacks

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

There are 2 versions of this paper

Date Written: October 2013

Abstract

We introduce a method for estimating the cost of adjusting earnings, as well as the earnings elasticity. Our method uses information on bunching in the earnings distribution at convex budget set kinks before and after policy-induced changes in the magnitude of the kinks: the larger is the adjustment cost, the smaller is the absolute change in bunching from before to after the policy change. In the context of the Social Security Earnings Test, our results demonstrate that the short-run impact of changes in the effective marginal tax rate can be substantially attenuated.

Suggested Citation: Suggested Citation

Gelber, Alexander M. and Jones, Damon and Sacks, Daniel W., Estimating Earnings Adjustment Frictions: Method and Evidence from the Social Security Earnings Test (October 2013). NBER Working Paper No. w19491, Available at SSRN: https://ssrn.com/abstract=2336357