Read on Twitter
THREAD. In my latest working paper, @dwschanz and I find that EITC expansions increase employment. On average, employment increased by about 5 percentage points by the fifth year following an EITC expansion.
2/ Most of the existing economics literature focuses on federal EITC expansions in the 1980s and 1990s. Our paper takes a longer view, studying all federal EITC expansions together, with a unified empirical framework, using modern econometric methods.
3/ By using the same sample definitions and methods, we allow readers to compare directly how different expansions have affected employment. We are also able to study all five federal expansions in the same specifications.
4/ In addition, we are able to reexamine the expansions of the 1980s and 1990s using difference-in-differences and event-study techniques, including studying the dynamic effect of
the EITC on the extensive margin of labor supply.
the EITC on the extensive margin of labor supply.
5/ Conclusion: We find broad support for the hypothesis that the EITC’s labor supply incentives increase employment. https://www.nber.org/papers/w28041
6/ Background: The EITC is a refundable tax credit for low-income, working households. It lifts millions out of poverty each year. Approx. one in six tax returns claimed the EITC in 2017. Program cost: $66.4B. Average credit, unmarried parents = $2,400.
7/ This is a graph of the EITC, showing how the maximum credit evolved over time. Basic economic theory suggests those expansions should draw people from non-employment into the workforce. Our paper studies whether that happens.
8/ Studying each federal expansion separately, we find evidence that four of the five EITC expansions — the program’s introduction in 1975, and the 1986, 1990,
and 1993 expansions — increased employment among the targeted population.
and 1993 expansions — increased employment among the targeted population.
9/ Next, we study the 1993 expansion in more detail.
This graph shows employment rates for unmarried women with relatively low levels of education. The difference between mothers and childless women narrowed, and even reversed, over time.
How much of that is due to the EITC?
This graph shows employment rates for unmarried women with relatively low levels of education. The difference between mothers and childless women narrowed, and even reversed, over time.
How much of that is due to the EITC?
10/ The credit expansion in 1993 was large, and it occurred during a period in which many states were experimenting with changes to their welfare policies that were designed to increase employment. (For example, implementing time limits on the receipt of cash welfare.)
11/ Because these policy changes happened concurrently,
estimates of the 1993 EITC expansion’s employment effect could be confounded by the effects of state-level welfare reform policies on employment.
estimates of the 1993 EITC expansion’s employment effect could be confounded by the effects of state-level welfare reform policies on employment.
12/ We use a straightforward method to study whether the 1993 ETIC expansion increased employment independent of changes to state welfare policies: We estimate the credit expansion’s effect only in states that did not enact
welfare reforms.
welfare reforms.
13/ We find strong EITC impacts on employment in these states, building confidence that the 1993 EITC expansion increased employment separate and apart from any
employment effects from state welfare reform policies.
employment effects from state welfare reform policies.
14/ We then attempt to estimate “the” EITC-employment effect by pooling all expansions together in one difference-in-difference model. We find that a $1,000 increase in the size of the maximum credit is associated with a 3.2 to 3.7 percentage point increase in employment.
15/ For unmarried mothers with two children, the maximum credit increased by $2,045 following the 1993 expansion, and employment rates among this group increased by 11 percentage points relative to childless unmarried women by
1996.
1996.
16/ Applying our estimates suggests that the EITC expansion explains 59 percent of the increase in employment rates among the targeted population during this period.
17/ To our knowledge, the only other paper to look comprehensively at all five federal EITC expansions is Kleven (2019), a working paper. We reconcile our results with Kleven, walk the reader through the differences, and argue for our approach. https://www.wsj.com/articles/an-overhyped-tax-credit-11580948345
Fin/ Econ 101: If you subsidize employment, you get more of it. Our results suggest that Congress should be reasonably confident that future EITC expansions would increase employment.
Check out the full paper here: https://www.aei.org/wp-content/uploads/2020/11/Schanzenbach-Strain-NBER.pdf
Check out the full paper here: https://www.aei.org/wp-content/uploads/2020/11/Schanzenbach-Strain-NBER.pdf
