LE_presentation_AnuragMittal unimelb.pptx

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1. “LABOR SUPPLY RESPONSE TO THE EARNED INCOME TAX CREDIT” Nada Elissa & Jeffrey B Liebman Presented By – Anurag Mittal

2. Question How does the expansion of the Earned Income Tax Credit (EITC), particularly through the Tax Reform Act of 1986 (TRA86), impact the labor force participation and hours worked by single women with children? The paper compares labor supply changes between single women with children and single women without children. Assessing the increase in labor force participation and changes in work hours because of EITC expansion. What is EITC? The EITC is a refundable tax credit aimed at providing financial assistance to low-income working families, particularly those with children. It is designed to offset the burden of payroll taxes and encourage labor force participation by supplementing the earnings of low-income workers.

3. Basic Eligibility of EITC & generalized impact The taxpayer’s adjusted gross income and earned income must be below a specified threshold. For example, in 1996, the maximum income for a taxpayer with two or more children to be eligible for the EITC was $28,495. The taxpayer must have a qualifying child, which is defined as a child, grandchild, stepchild, or foster child under the age of 19 (or under 24 if a full-time student) who lives with the taxpayer for more than half of the tax year. the Earned Income Tax Credit (EITC) shifts the budget constraint of an individual, increasing the after-tax earnings for every level of work. This shift encourages labor force participation because it improves the financial well-being of workers without affecting those who do not work. The impact of the EITC on the labor force participation of unmarried taxpayers is clearly positive, as it makes entering the labor force more appealing due to the additional after-tax income.

4. Empirical Strategy Focus Group : The study examines the labor supply response of single women with children to the 1987 expansion of the Earned Income Tax Credit (EITC), part of the Tax Reform Act of 1986 (TRA86). Single women with children were chosen as they make up a significant portion of EITC-eligible taxpayers and are the most relevant group for studying the impact on welfare dependency. Comparison Approach : The empirical strategy relies on a difference-in-differences approach, comparing the changes in labor force participation and hours worked between single women with children (treatment group) and single women without children (control group) before and after the TRA86. Alternative Treatment/Control Groups : Single women with children and low levels of education or predicted income within the EITC eligibility range. Control Groups: Single women without children with low education or predicted income in the EITC range and single women with children but higher education levels, predicting income beyond the EITC range. Assumptions : The strategy assumes there are no contemporaneous shocks or underlying trends affecting the treatment and control groups differently except for the tax changes.

5. Data Source : The data comes from the Current Population Surveys (CPS) for the years 1985-1987 and 1989-1991, which contain demographic, labor market, and income information for approximately 57,000 households annually.(For tax years they chose 1984-86 & 1988-90) Sample : The sample includes unmarried females aged 16-44, excluding those who were separated, ill, disabled, or in school full time. Also excluded are women with negative earnings, unearned income, or zero hours of work with positive earnings. Unit of Analysis : The analysis is based on tax-filing units derived from CPS families, where subfamilies are treated as separate tax-filing units. Dependent children are identified as those under 19 years (or under 24 if full-time students). Sample Size : The total sample size across the six years is 67,097 observations. Summary Statistics : The study provides detailed summary statistics for the treatment and control groups, highlighting differences in age, education etc.

6. Basic Participation results

7. Model Specification: P( lfp it ​ =1)=Φ(α+βZ it ​ +γ 0​ treatment i +γ 1​ post86 t ​ +δ(treatment×post86) it ​ ) P( lfp_it = 1) : This is the probability that a woman ( i ) participates in the labor force in year (t). Labor force participation ( lfp ) is a binary variable that equals 1 if the woman worked at least one hour during the previous year and 0 otherwise. Φ : This represents the cumulative distribution function of the standard normal distribution used in the probit model to estimate probabilities. α : The intercept term in the model, which captures the baseline probability of labor force participation when all other variables are set to zero. Z: Unearned income, Number of children, Family size, Number of preschool children, Age, Education, Race, Year Γ 0treatment: variable is equal to 1 if the woman is in the treatment group, i.e., she has children and is thus eligible for the EITC. γ1post86t​ : This variable is equal to 1 for years after 1986, capturing the overall effect of the TRA86 on labor force participation for both treatment and control groups. δ(treatment×post86) The interaction term between being in the treatment group and the post-1986 period. The coefficient measures the difference in the impact of TRA86 on labor force participation between the treatment group and the control group.

8. Labor Force Participation Impact : The presence of children significantly reduces labor force participation among unmarried women. Effect of the TRA86 on Women with Children : TRA86 increased labor force participation of unmarried women with children by 1.9 percentage points. . Education : Higher education levels positively correlate with increased labor force participation. Consistency Across Models : The positive impact of TRA86 on labor force participation is robust across different model specifications.

9. Alternative Explanations

10. Impact on Hours Worked

11. Possible Reasons Behind Participation Effect But No Hours Effect Greater Responsiveness in Labor Force Participation : Economic studies commonly find that labor force participation is more responsive to changes in the net wage than the number of hours worked. This suggests that people are more likely to decide whether to work at all rather than adjusting the number of hours they work in response to changes in incentives. Low Awareness and Understanding of the EITC : Many EITC recipients are either unaware that they receive the credit or do not fully understand how it works. As a result, they may perceive the EITC as a lump-sum benefit rather than something that should affect their decisions on the number of hours worked, leading to a stronger effect on participation than on hours worked. Measurement Challenges in Hours Worked : It is easier to measure labor force participation than the number of hours worked. If workers report round numbers for hours, it would require a significant change in hours for the effect to be noticeable in the data. Potential Unknown Positive Shock : The observed increase in both participation and hours worked for single women with children, compared to those without, could potentially be due to an unknown positive shock that affected this group during the study period.

12. Conclusion EITC's Positive Impact on Labor Force Participation : The 1987 expansion of the EITC significantly increased labor force participation among single women with children, with the most substantial impact observed among those with less than high school education. No Significant Reduction in Hours Worked : Contrary to theoretical predictions, the EITC expansion did not reduce the hours worked by those already in the labor force, suggesting that the EITC primarily influenced the decision to enter the labor force rather than the number of hours worked. Policy Implications : The EITC appears to be an effective income transfer program with minimal distortion to work incentives, making it a potentially desirable policy tool for redistributing income to the working poor while maintaining efficiency.

13. Thank You