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

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

NBER Working Paper No. 19491
Issued in October 2013, Revised in January 2019
NBER Program(s):Aging, Economic Fluctuations and Growth, Labor Studies, Monetary Economics, Public Economics

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.

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Document Object Identifier (DOI): 10.3386/w19491

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