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

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1 The Earned Income Tax Credit, Welfare Reform, and the Employment of Low Skill Single Mothers Strategies for Improving Economic Mobility Of Workers November 15-16, 2007 Hilary W. Hoynes Professor, University of California, Davis and NBER 1

2 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? 2

3 Percent of Women Working (by Marital Status and Children) 100% 95% Percent employed at all last year 90% 85% 80% 75% 70% Single, No Children Married, No Children 65% Single, Children Married, Children 60% On the eve of these policy changes, much attention is given to low employment rates of single mothers. 3

4 Percent of Women Working (by Marital Status and Children) 100% 95% Percent employed at all last year 90% 85% 80% 75% 70% Single, No Children Married, No Children 65% Single, Children Married, Children 60% Beginning in 1992 dramatic increases in employment for single mothers, with little change for other women 4

5 Brief description of policy changes 1) Welfare reform 2) Expansion in the Earned Income Tax Credit 5

6 Welfare Reform Long standing concern of AFDC: high benefit reduction rate creates disincentives to work. Two periods of change State waivers ( ): 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 6

7 AFDC/TANF Caseloads 6 5 Millions of Families

8 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, children $4,716 $37,783 8

9 EITC Costs now exceed AFDC/TANF $50 $40 $2006 Billions $30 $20 $10 AFDC/TANF Expenditure $0 EITC Expenditure

10 EITC Benefit Structure, Single mothers in 2007 $5,000 Credit Amount (2006$) $4,000 $3,000 $2,000 Phase in Region Flat Region Substantially larger credit for families with 2+ children Phase out Region $1,000 $0 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 Earned Income 2006$ One Child Two or more Children 10

11 Real EITC Benefits Increasing over Time Credit Amount (2006$) $5,000 $4,000 $3,000 $2, [After OBRA93] 1993 [After OBRA90] 1988 [After TRA84] 1984 [Before TRA86] $1,000 $0 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 Earnings 2006$ 11

12 Now back to the employment figure 12

13 Percent of Women Working (by Marital Status and Children) 100% 95% Percent employed at all last year 90% 85% 80% 75% 70% Single, No Children Married, No Children 65% Single, Children Married, Children 60%

14 These increases are large: 16 percentage point increase in employment rates between 1992 and 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. 14

15 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 employment gains: 35% due to EITC, 20% due to welfare reform employment gains: 60% due to EITC, 15% due to welfare reform 15

16 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 16