Using Non-Linear Budget Sets to Estimate Extensive Margin Responses: Method and Evidence from the Social Security Earnings Test

73 Pages Posted: 20 Apr 2017 Last revised: 12 Sep 2018

See all articles by Alexander Gelber

Alexander Gelber

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

Damon Jones

University of Chicago - Irving B. Harris Graduate School of Public Policy Studies

Daniel W. Sacks

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

Jae Song

U.S. Social Security Administration

Date Written: September 11, 2018

Abstract

We develop a method for estimating the effect of a kinked or notched budget set on workers employment decisions, and we use it to estimate the impact of the Social Security Old-Age and Survivors Insurance (OASI) Annual Earnings Test (AET). The AET reduces OASI claimants' current OASI benefits in proportion to their earnings in excess of an exempt amount. Using a Regression Kink Design and Social Security Administration data, we document that the discontinuous change in the benefit reduction rate at the exempt amount causes a corresponding change in the slope of the employment rate. We develop conditions in a general setting under which we can use such patterns to estimate the elasticity of the employment rate with respect to the effective average net-of-tax rate. Our resulting point estimate for the AET indicates an elasticity of at least 0.49, suggesting that the AET reduces employment by more than one percentage point in the group we study.

Keywords: Kinked Budget Sets; Extensive Margin; Employment; Social Security; Taxes

JEL Classification: H24, H31, H55, J22, J14

Suggested Citation

Gelber, Alexander and Jones, Damon and Sacks, Daniel W. and Song, Jae, Using Non-Linear Budget Sets to Estimate Extensive Margin Responses: Method and Evidence from the Social Security Earnings Test (September 11, 2018). Kelley School of Business Research Paper No. 17-39. Available at SSRN: https://ssrn.com/abstract=2954856 or http://dx.doi.org/10.2139/ssrn.2954856

Alexander Gelber (Contact Author)

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 - Irving B. Harris Graduate School of Public Policy Studies ( 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

Jae Song

U.S. Social Security Administration ( email )

Washington, DC 20254
United States
202-358-6403 (Phone)
202-358-6192 (Fax)

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