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Examining the Effect of the Earned Income Tax Credit on the Labor Market Participation of Families on Welfare

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  • V. Joseph Hotz
  • John Karl Scholz

Abstract

This paper examines the employment effects of the earned income tax credit (EITC). We use a unique dataset, created by matching administrative data from public assistance records, unemployment insurance records, and federal tax returns for a sample of California residents. We conduct a set of four tests to assess our ability to isolate the causal effects of the EITC on employment. The first test is based on the intuition that if the EITC alters employment, all else being equal, employment rates for two-or-more child families should grow relative to the employment rates of one-child families, as credit amounts available to these groups of families diverged over the 1990s. The second test examines whether or not people eligible for the EITC actually file tax returns and claim it. The third test is based on the intuition that, if the EITC, and not other factors such as the strong economy in the 1990s, is causing employment differences between families with two or more children relative to those with one child, we should expect to see no employment differences (after conditioning on other characteristics) between families with two children and families with three or more children, since the EITC did not change differentially for the latter two groups. The fourth test conditions the sample on those who do not file tax returns and again examines employment changes in the 1990s for families with two or more children relative to families with one child. Using fixed-effects empirical employment models estimated on a sample of single-parent families, our coefficient estimates are consistent with the EITC having a substantial, positive effect on the employment of families who have used or will use welfare.

Suggested Citation

  • V. Joseph Hotz & John Karl Scholz, 2006. "Examining the Effect of the Earned Income Tax Credit on the Labor Market Participation of Families on Welfare," NBER Working Papers 11968, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11968
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    2. Donald S. Kenkel & Maximilian D. Schmeiser & Carly Urban, 2014. "Is Smoking Inferior?: Evidence from Variation in the Earned Income Tax Credit," Journal of Human Resources, University of Wisconsin Press, vol. 49(4), pages 1094-1120.
    3. Maximilian D. Schmeiser, 2012. "The impact of long‐term participation in the supplemental nutrition assistance program on child obesity," Health Economics, John Wiley & Sons, Ltd., vol. 21(4), pages 386-404, April.
    4. Florian Buhlmann & Benjamin Elsner & Andreas Peichl, 2018. "Tax refunds and income manipulation: evidence from the EITC," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(6), pages 1490-1518, December.
    5. Alessio Brown & Johannes Koettl, 2015. "Active labor market programs - employment gain or fiscal drain?," IZA Journal of Labor Economics, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-36, December.
    6. Gunter, Samara, 2013. "State Earned Income Tax Credits and Participation in Regular and Informal Work," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(1), pages 33-62, March.
    7. William N. Evans & Craig L. Garthwaite, 2014. "Giving Mom a Break: The Impact of Higher EITC Payments on Maternal Health," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 258-290, May.
    8. Palviainen Heikki, 2021. "Incentivizing last-resort social assistance clients: Evidence from a Finnish policy experiment," Working Papers 2132, Tampere University, School of Management and Business, Economics.
    9. Richard V. Burkhauser & Kosali I. Simon, 2008. "Who Gets What From Employer Pay or Play Mandates?," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 11(1), pages 75-102, March.
    10. Francesco Agostinelli & Emilio Borghesan & Giuseppe Sorrenti, 2020. "Welfare, Workfare and Labor Supply: A Unified Evaluation," Working Papers 2020-083, Human Capital and Economic Opportunity Working Group.
    11. Timothy F. Harris, 2018. "Do SNAP Work Requirements Work?," Upjohn Working Papers and Journal Articles 19-297, W.E. Upjohn Institute for Employment Research.
    12. Bertin Martens & Songul Tolan, 2018. "Will this time be different? A review of the literature on the Impact of Artificial Intelligence on Employment, Incomes and Growth," JRC Working Papers on Digital Economy 2018-08, Joint Research Centre (Seville site).
    13. Maggie R. Jones, 2014. "The EITC over the business cycle: Who benefits?," CARRA Working Papers 2014-15, Center for Economic Studies, U.S. Census Bureau.
    14. Tracy L. Regan & Gulcin Gumus, 2006. "Tax Incentives as a Solution to the Uninsured: Evidence from the Self-Employed," Working Papers 0709, University of Miami, Department of Economics, revised Oct 2007.
    15. Akbulut-Yuksel, Mevlude & Khamis, Melanie & Yuksel, Mutlu, 2011. "Rubble Women: The Long-Term Effects of Postwar Reconstruction on Female Labor Market Outcomes," IZA Discussion Papers 6148, Institute of Labor Economics (IZA).
    16. Cowan Benjamin & Tefft Nathan, 2012. "Education, Maternal Smoking, and the Earned Income Tax Credit," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-39, October.
    17. Katie Fitzpatrick & Jeffrey Thompson, 2009. "The Interaction of Metropolitan Cost-of-living & the Federal Earned Income Tax Credit: One Size Fits All?," Working Papers wp204, Political Economy Research Institute, University of Massachusetts at Amherst.
    18. Palviainen Heikki, 2018. "Evaluation of the Finnish Income Disregard Reform," Working Papers 1819, Tampere University, School of Management and Business, Economics.
    19. Bastian, Jacob E. & Jones, Maggie R., 2021. "Do EITC expansions pay for themselves? Effects on tax revenue and government transfers," Journal of Public Economics, Elsevier, vol. 196(C).

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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor

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