The Mid-1990s EITC Expansion: Aggregate Labor Supply Effects and Economic Incidence

Jesse Rothstein

No 883, Working Papers from Princeton University, Department of Economics, Industrial Relations Section.

Abstract: A key attraction of the Earned Income Tax Credit (EITC) is that it encourages work. But EITC-induced increases in labor supply may drive wages down, permitting employers of low-skill labor to capture some of the intended transfer and negatively impacting workers in the same labor markets who are ineligible for the credit. I exploit variation in tax treatment across family types and skill levels to identify the effect of a large EITC expansion in the mid 1990s on the female labor market, using a semiparametric reweighting strategy to decompose changes in the wage distribution into changes in skill-specific prices and quantities. The EITC expansion induced many low- and mid-skill single mothers to enter the labor force. Contemporaneous technical change led to increases in wages, but these were smaller than they would have been with a stable EITC. Ceteris paribus, low-skill single mothers keep only 70 cents of every dollar they receive through the EITC. Employers of low-skill labor capture 72 cents, 30 cents from single mothers plus 43 cents from ineligible (childless) workers whose after-tax incomes fall when the EITC is expanded. The net transfer to workers is less than a third of the amount spent on the program.

Keywords: tax incidence; labor supply; labor demand; EITC; Earned Income Tax Credit (search for similar items in EconPapers)
JEL-codes: I38 (search for similar items in EconPapers)
Date: 2005-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://dataspace.princeton.edu/bitstream/88435/dsp01f7623c587/1/504.pdf
Our link check indicates that this URL is bad, the error code is: 500 Internal Server Error

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pri:indrel:504

Access Statistics for this paper

More papers in Working Papers from Princeton University, Department of Economics, Industrial Relations Section. Contact information at EDIRC.
Bibliographic data for series maintained by Bobray Bordelon ().