The Labor Supply Effect of Social Security Earnings Test Revisited: New Evidence from its Elimination and Revival in Japan

Evidence on the effect of the social security earnings test on the labor supply of the elderly continues to be mixed. We utilize micro-level data compiled by the Japanese government in order to examine the labor supply effect for those aged 65-69 before and after two major reforms of the social security earnings test in Japan: its elimination in 1985 and its revival in 2002. We provide little evidence that the changes in the earnings test affected the wage distribution of the elderly after controlling for changes in the attributes of workers and firms.At the same time, the direct survey responses to the effect of the revival in 2002 reveals a large effect on the labor supply of the elderly. These empirical findings indicate the risk that a traditional bunch analysis underestimates the labor supply effect when it is obscured by measurement errors or labor market rigidities.