Employment Responses to Income Effect: Evidence from Pension Reform

23 Pages Posted: 27 Apr 2021

See all articles by Sebastian Becker

Sebastian Becker

affiliation not provided to SSRN

Hermann Buslei

affiliation not provided to SSRN

Johannes Geyer

German Institute for Economic Research (DIW Berlin)

Peter Haan

DIW Berlin, German Institute for Economic Research; IZA Institute of Labor Economics

Date Written: April 2021

Abstract

For the design of the pension system, it is crucial to disentangle the employment responses related to the substitution effect and the income effect. In this paper, we provide causal evidence regarding the importance of the income effect, which is generally assumed to be small or non-existent. We exploit a pension reform in Germany that raised pension bene- fits related to children. For the identification, we exploit the discontinuity induced by the reform: only mothers with children born before 1.1.1992 were affected by the pension reform. Children born after this cut-off date did not change pension income. We use a difference-in-differences estimator based on administrative data from the German pension insurance that includes complete individual employment histories. We find that income effects are significant and economically important. We show that the policy led to a reduction in the employment of affected females. Further, we are able to show effect heterogeneity on different dimensions: by treatment intensity, age of the mother, and pre-reform pension wealth.

Keywords: Natural experiment, female labor supply, pension benefit

JEL Classification: H55,J13,J22

Suggested Citation

Becker, Sebastian and Buslei, Hermann and Geyer, Johannes and Haan, Peter, Employment Responses to Income Effect: Evidence from Pension Reform (April 2021). DIW Berlin Discussion Paper No. 1941, Available at SSRN: https://ssrn.com/abstract=3834988 or http://dx.doi.org/10.2139/ssrn.3834988

Sebastian Becker

affiliation not provided to SSRN

Hermann Buslei

affiliation not provided to SSRN

Johannes Geyer

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

HOME PAGE: http://www.diw.de/programme/jsp/MA.jsp?uid=jgeyer&language=en

Peter Haan (Contact Author)

DIW Berlin, German Institute for Economic Research ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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