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

73 Pages Posted: 5 Oct 2013

See all articles by Alexander Gelber

Alexander Gelber

National Bureau of Economic Research (NBER); University of California, Berkeley

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

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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

Gelber, Alexander 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

Alexander Gelber

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Damon Jones

University of Chicago - Harris School of Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

Daniel W. Sacks

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

Bloomington, IN 47405
United States

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