The Earned Income Tax Credit, Welfare Reform, and the Employment of - - PowerPoint PPT Presentation

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The Earned Income Tax Credit, Welfare Reform, and the Employment of Low Skill Single Mothers

Hilary W. Hoynes Professor, University of California, Davis and NBER

Strategies for Improving Economic Mobility Of Workers November 15-16, 2007

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Overview

• Employment of single mothers with children increased

dramatically in the 1990s

• Incentives to work increased substantially during this

period:

– Push factor: welfare reform – Pull factor 1: EITC expansion – Pull factor 2: strong labor market, rising wages

• How did these forces contribute to the increase in the

employment of single mothers with children?

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Percent of Women Working (by Marital Status and Children)

On the eve of these policy changes, much attention is given to low employment rates of single mothers.

60% 65% 70% 75% 80% 85% 90% 95% 100%

1983 1986 1989 1992 1995 1998 2001 2004 Percent employed at all last year

Single, No Children Married, No Children Single, Children Married, Children

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Percent of Women Working (by Marital Status and Children)

Beginning in 1992—dramatic increases in employment for single mothers, with little change for other women

60% 65% 70% 75% 80% 85% 90% 95% 100%

1983 1986 1989 1992 1995 1998 2001 2004 Percent employed at all last year

Single, No Children Married, No Children Single, Children Married, Children

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Brief description of policy changes

1) Welfare reform 2) Expansion in the Earned Income Tax Credit

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Welfare Reform

• Long standing concern of AFDC: high benefit reduction

rate creates disincentives to work.

• Two periods of change

– State waivers (1992-1996): voluntary changes to AFDC – Federal reform (1996): Mandates elimination of AFDC, replacement with TANF

• Emphasis in reform on increasing employment and

reducing welfare caseloads through:

– Time limits – Work requirements – Increasing financial returns to work

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AFDC/TANF Caseloads

1 2 3 4 5 6

1970 1975 1980 1985 1990 1995 2000 2005

Millions of Families

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The Rise of the Earned Income Tax Credit

• The EITC is an earnings subsidy that is provided through the

federal tax system

• Refundable tax credit for working low income families with

children

• The EITC has increased in importance through policy

expansions in 1986, 1990, and 1993

• Redistributes income to disadvantaged families while

subsidizing work

2007 EITC for Single Parents Maximum Credit Eligible at incomes up to 1 child $2,853 $33,241 2+ children $4,716 $37,783

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EITC Costs now exceed AFDC/TANF

$0 $10 $20 $30 $40 $50 1975 1980 1985 1990 1995 2000 2005 $2006 Billions AFDC/TANF Expenditure EITC Expenditure

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EITC Benefit Structure, Single mothers in 2007

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000

Earned Income 2006$

Credit Amount (2006$)

One Child Two or more Children

Phase in Region Phase out Region Flat Region

Substantially larger credit for families with 2+ children

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Real EITC Benefits Increasing over Time

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000

Earnings 2006$

Credit Amount (2006$) 2006 [After OBRA93] 1993 [After OBRA90] 1988 [After TRA84] 1984 [Before TRA86]

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Now back to the employment figure …

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Percent of Women Working (by Marital Status and Children)

60% 65% 70% 75% 80% 85% 90% 95% 100%

1983 1986 1989 1992 1995 1998 2001 2004 Percent employed at all last year

Single, No Children Married, No Children Single, Children Married, Children

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• These increases are large: 16 percentage point increase

in employment rates between 1992 and 1999.

• The increases are even larger—20 percentage points—

if you look at single mothers with a high school education or less (who are more likely to be affected by the EITC and welfare reform)

• No other group (male or female) experienced a change

like this.

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Explanations for increasing employment of single mothers

• Difficult to decompose influences of: EITC expansion,

welfare reform and strong labor market

– Each are expected to increase employment – They occurred at (largely) the same time

• Overwhelming evidence that all three factors matter
• Very consistent results across studies using different

methodologies

• Work by Meyer and Rosenbaum (2001) shows that

– 1992–1996 employment gains: 35% due to EITC, 20% due to welfare reform – 1984–1996 employment gains: 60% due to EITC, 15% due to welfare reform

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Conclusions

• The last decade has seen major shifts in government

assistance for single mothers

– Decline in cash welfare benefits for non-workers – Rise in tax-based benefits for workers

• Employment rates of single mothers increased

dramatically during this period

• The research uniformly shows that welfare reform and

the expansion of the EITC contributed to this increase in employment