Institute for Research on Labor and Employment

Policy-makers often aim to increase labor force participation by increasing the returns to work – either by cutting tax rates or reducing the rate at which benefits are phased out. A recent paper by Alexander Gelber, Damon Jones, and Daniel Sacks uses the Social Security Earnings Test to show that it takes significant time for people to adjust their work in response to changes in work incentives – typically two to three years. If the authors’ results on Social Security benefits are also true for other fiscal policies, this implies that such policy changes may do less in the short run to affect work, and that the full effects may materialize with a significant lag. This is relevant as policy-makers seek to project the effects of such policy changes on work over time.