The incidence of pension contributions

What matters: marginal or average rates?

We find that the incidence of the pension contribution on employers is 70%. This indicates that employers shift less to employees than found in earlier studies.

This is surprising as pension contributions go together with personal bene ts. The bargaining model and sticky wages seem more applicable to explain our findings than the standard model of incidence, at least in the short to medium run.

This paper investigates the incidence of pension contributions using a unique longitudinal administrative dataset covering individual employees at different pension funds in the Netherlands for the period 2006-2012. With a panel-based difference-in- difference approach, we estimate the response of wages, labor cost and hours worked to both marginal and average contribution rates, which provides us insight into the mechanisms underlying incidence. In contrast to the standard demand and supply model of labor we find that average contribution rates matter more for incidence than marginal rates. Moreover, we find that a substantial part of the burden (some 70%) is borne by employers. This is in line with the statutory contribution rates (on average 70-30 for employers and employees) but could also be explained by other factors such as non-salience or bargaining. Together our findings indicate that incidence is best explained by a bargaining model of wages, at least in the short and medium term considered in our analysis.

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