Stepping Stone or Dead End? The Effect of the EITC on Earnings Growth

The Earned Income Tax Credit (EITC) has many complex provisions which could affect economic behavior.

Past research has analyzed data indicating that

EITC raises labor force participation rates among single mothers, especially those with little education

EITC does not reduce marriage rates (despite the large marriage penalty built into the EITC!)

EITC does not promote higher birth rates (despite the large tax benefits associated with claiming one or two "qualifying children" on a tax return.)

A new study published in the June 2009 issue of the National Tax Journal tackles a new question about the effects of the EITC:

[D]o single mothers who are pulled into employment by the EITC improve their labor market outcomes through increased earnings over time or do they remain stuck in low-earning jobs? On the one hand, we might expect increases in earnings over time. Evidence suggests that even among less-skilled groups, the returns to labor market experience are large (Gladden and Taber, 2000, 2006). On the other hand, we might not expect increases in earnings over time if the employment opportunities available to such single mothers are limited to ‘dead-end’ jobs that have with little potential for future earnings growth.

The authors' conclusion:

Using a panel of administrative earnings data linked to nationally representative survey data, we find no evidence that the EITC expansions between 1994 and 1996 induced single mothers to take “dead–end” jobs. If anything, the increase in earnings growth during the mid–to–late 1990s for single mothers who were particularly affected by the EITC expansion was higher than it was for other similar women. The EITC encourages work among single mothers, and that work continues to pay off through future increases in earnings.

Molly Dahl (Congressional Budget Office), Thomas DeLeire (University of Wisconsin, Robert M. LaFollette School of Public Affairs) & Jonathan Schwabish (Congressional Budget Office) Stepping Stone or Dead End? The Effect of the EITC on Earnings Growth.

hat tip: Taxprof Paul Caron