Working Paper: NBER ID: w1284
Authors: James N. Brown; Harvey S. Rosen
Abstract: This paper examines the effect of earnings taxes on the variability of wages over time. We estimate a "hedonic wage locus" which indicates how the market allows individuals to substitute the mean level of the wage for its variability across jobs. Information from this locus is used to estimate the parameters of individuals' indifference curves between the mean and temporal variation of hourly wages. On the basis of these utility function parameters, we predict that lowering the rate of taxation on earnings would on average lead workers to choose jobs with a higher pre-tax mean wage and with greater wage variation.
Keywords: Taxation; Wage Variation; Job Choice
JEL Codes: H24; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lowering the rate of taxation on earnings (H31) | Workers choose jobs with a higher pretax mean wage (J39) |
| Lowering the rate of taxation on earnings (H31) | Workers choose jobs with greater wage variation (J29) |
| Wage variability may increase utility (D11) | Predictable wage variability (J31) |
| Wage variability may decrease utility (D11) | Unforeseen wage variability (J31) |