Question

Use the theory of labor supply graph to explain what the effect of Earned Income Tax Credit on low-income unmarried mothers who are working versus those who are not?

Answer 1

ans.

Studies indicate that the EITC has a positive effect on the labor force participation of single mothers. These studies generally examine how significant legislative expansions of the EITC influenced previously nonworking single mothers’ decisions to enter the workforce. For example, one study found that the creation of a larger credit for unmarried individuals with two or more children in the early-1990s resulted in a sharp increase in employment among single mothers. Another study found that 34% of the increase in employment among single mothers between 1993 and 1999 was due to legislative expansions of the EITC. Other research found that “60% of the 8.7 percentage point increase in annual employment of single mothers between 1984 and 1996 is attributable to the EITC with its expansion.” In addition to encouraging many single mothers to enter the workforce, the EITC also played a role in reducing welfare caseloads. Research evaluating the interaction between welfare policy and the EITC in the 1990s found that the EITC had a substantial effect in reducing new entries into the cash welfare program. In other words, many single mothers chose to work, and receive the EITC, rather than apply for welfare.

In comparison to unmarried workers, research is less conclusive as to the impact of the EITC on married secondary earners’ decisions to start working. Some empirical evidence suggests that the EITC has caused a small percentage of married mothers to stay out of the labor force. One study, which assumed that married secondary earners were women, found that “the 1993 EITC expansion led to a one percentage point reduction in the participation rate of married mothers.” Another study found that legislative changes that expanded the EITC resulted in some married women choosing not to work. 3 Couples may decide, for example, that one spouse’s EITC is sufficiently large to allow the other spouse to stay out of the workforce and instead raise children. These couples could determine that having two earners would not only reduce their EITC, but may also increase the cost of other expenses, like child care, ultimately lowering their disposable income. However, more recent research has found that among married women, the EITC has had a negligible effect on labor force participation. If the EITC is discouraging some secondary earners from working it would effectively be “subsidizing the lower earning partner in a married couple to stay home.” Whether that is desirable from a policy perspective depends on policymakers’ goals with respect to married couples with children.