EARNINGS ADJUSTMENT FRICTIONS: EVIDENCE FROM SOCIAL SECURITY EARNINGS TEST
September 2013
Working Paper Number:
CES-13-50
Abstract
We study frictions in adjusting earnings to changes in the Social Security Annual Earnings Test (AET) using a panel of Social Security Administration microdata on one percent of the U.S. population from 1961 to 2006. Individuals continue to "bunch" at the convex kink the AET creates even when they are no longer subject to the AET, consistent with the existence of earnings adjustment frictions in the U.S. We develop a novel framework for estimating an earnings elasticity and an adjustment cost using information on the amount of bunching at kinks before and after policy changes in earnings incentives around the kinks. We apply this method in settings in which individuals face changes in the AET bene.t reduction rate, and we estimate in a baseline case that the earnings elasticity with respect to the implicit net-of-tax share is 0.23, and the .xed cost of adjustment is $152.08.
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estimation,
estimating,
payroll,
quarterly,
earnings,
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Alfred P Sloan Foundation,
Longitudinal Employer Household Dynamics,
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Disability Insurance,
Federal Insurance Contribution Act,
Earned Income Tax Credit,
W-2,
Master Earnings File,
National Institutes of Health
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