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The EITC and the Extensive Margin: A Reappraisal

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  • Henrik Kleven

Abstract

A strong consensus posits that the Earned Income Tax Credit (EITC) has had sizable effects on extensive margin labor supply, especially for single mothers. This paper reappraises the difference-in-differences and event study approaches that underpin much of this consensus. The paper investigates every EITC reform at the state and federal level since the inception of the policy. All reforms are analyzed in an event study framework and a comprehensive analysis of model uncertainty is presented. Apart from the federal 1993 reform, EITC expansions are not associated with any clear and robust effects on employment. Treatment impact estimates from about 500 event studies are symmetrically distributed around zero. Specifications with large elasticities are outliers in the distribution. The 1993 reform, on the other hand, is associated with large employment increases for single mothers. Based on a number of different analyses, the paper shows that these increases align more closely with confounding effects from welfare reform and the macroeconomy than with the EITC. Overall, difference-in-differences and event study analyses of EITC reforms are fragile to specification choices and do not support robustly large effects.

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  • Henrik Kleven, 2019. "The EITC and the Extensive Margin: A Reappraisal," NBER Working Papers 26405, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26405
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    References listed on IDEAS

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    1. Jacob Bastian, 2020. "The Rise of Working Mothers and the 1975 Earned Income Tax Credit," American Economic Journal: Economic Policy, American Economic Association, vol. 12(3), pages 44-75, August.
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    More about this item

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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