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


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
e¤ect 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-speci c 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.

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