Microeconomic studies of the effect of government policy on labor supply typically relate individuals'labor supply to the policy regime that they fae contemporaneously. In the presence of barriers to adjustment of labor supply, however, individuals may respond to policy slowly, implying that long-run responses may be larger than short-run responses. In this project, we aim to estimate the speed with which elderly workers respond to policy, namely the Social Security Earnings Test. Relative to previous studies, we will apply more recently developed empirical methods in this context. Furthermore, we will use the pattern of adjustments estimated to distinguish between alternative explanations of incomplete adjustment among workers. Preliminary results suggest that adjustment happens with varying extent of delay, from at most one year to at most two years. Ultimately, the project will inform future research on the behavioral response to taxation and Social Security policy, by identifying the appropriate time horizon for studies, and also by providing insights into the natur and cause of delayed response among workers. The project will most directly pertain to elderly workers who face the Social Security Earnings test, but will also provide general insights for the field of public finance.
This research aims to quantify the amount of time it takes for individuals to respond to policy changes, with a specific focus on the Social Security Earnings Test. Furthermore, the nature and dynamics of adjustment will be used to help understand what causes a delay in response. Understanding these two concepts is crucial to designing optimal Social Security policy, which affects the labor supply and well-being of elderly workers.