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

  • V. Joseph Hotz
  • John Karl Scholz

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.

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File URL: http://www.nber.org/papers/w11968.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11968.

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Date of creation: Jan 2006
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Handle: RePEc:nbr:nberwo:11968
Note: CH PE
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  1. Nada Eissa & Jeffrey B. Liebman, 1995. "Labor Supply Response to the Earned Income Tax Credit," NBER Working Papers 5158, National Bureau of Economic Research, Inc.
  2. Stacy Dickert & Scott Houser & John Karl Scholz, 1995. "The Earned Income Tax Credit and Transfer Programs: A Study of Labor Market and Program Participation," NBER Chapters, in: Tax Policy and the Economy, Volume 9, pages 1-50 National Bureau of Economic Research, Inc.
  3. V. Joseph Hotz, 2003. "The Earned Income Tax Credit," NBER Chapters, in: Means-Tested Transfer Programs in the United States, pages 141-198 National Bureau of Economic Research, Inc.
  4. Bruce D. Meyer & Dan T. Rosenbaum, 1999. "Making Single Mothers Work: Recent Tax and Welfare Policy and its Effects," JCPR Working Papers 152, Northwestern University/University of Chicago Joint Center for Poverty Research.
  5. Robert A Moffitt & Mark Wilhelm, 2000. "Taxation and the Labor Supply - Decisions of the Affluent," Economics Working Paper Archive 414, The Johns Hopkins University,Department of Economics.
  6. Keane, Michael & Moffitt, Robert, 1998. "A Structural Model of Multiple Welfare Program Participation and Labor Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 553-89, August.
  7. Timothy J. Bartik & Randall W. Eberts, 1999. "Examining the Effect of Industry Trends and Structure on Welfare Caseloads," Upjohn Working Papers and Journal Articles 99-54, W.E. Upjohn Institute for Employment Research.
  8. Bruce D. Meyer & Dan T. Rosenbaum, 1999. "Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers," NBER Working Papers 7363, National Bureau of Economic Research, Inc.
  9. Ellwood, David T., 2000. "The Impact of the Earned Income Tax Credit and Social Policy Reforms on Work, Marriage, and Living Arrangements," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 1063-1106, December.
  10. V. Joseph Hotz & Charles H. Mullin & John Karl Scholz, 2002. "Welfare, Employment, and Income: Evidence on the Effects of Benefit Reductions from California," American Economic Review, American Economic Association, vol. 92(2), pages 380-384, May.
  11. Maria Cancian & Arik Levinson, 2002. "Labor Supply and Participation Effects of the Earned Income Tax Credit: Evidence form the National Survey of America's Families and Wisconsin's Supplemental Benefit for Families with Three Children," Working Papers gueconwpa~02-02-08, Georgetown University, Department of Economics.
  12. Jeffrey Grogger, 2003. "The Effects of Time Limits, the EITC, and Other Policy Changes on Welfare Use, Work, and Income among Female-Headed Families," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 394-408, May.
  13. Meyer, Bruce D. & Rosenbaum, Dan T., 2000. "Making Single Mothers Work: Recent Tax and Welfare Policy and its Effects," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 1027-62, December.
  14. Heckman, James J. & Robb, Richard Jr., 1985. "Alternative methods for evaluating the impact of interventions : An overview," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 239-267.
  15. V. J. Hotz & J. K. Scholz, . "Measuring Employment and Income for Low-Income Populations with Administrative and Survey Data," Institute for Research on Poverty Discussion Papers 1224-01, University of Wisconsin Institute for Research on Poverty.
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