The Earned Income Tax Credit and Labor Market Participation of Families on Welfare
In this paper we examine the effect of the EITC on the employment rates of adults who received welfare (AFDC) during the 1990s. The first part of the paper begins with a description of the changes in the EITC over the last ten years, its administration, and what is known about its of the changes in the EITC over the last ten years, its administration, and what is known about its welfare policy changes, earned income tax credit (EITC) increases in 1990 and 1993, and changes in local labor market conditions on the behavior of families who received welfare benefits in California during the early part of the 1990s. The data on welfare recipients that we analyze are drawn from the California Work Pays Demonstration Project (CWPDP). The CWPDP incorporated experimental variation in the benefits package received by treatment and control households drawn from California?s AFDC caseload in four counties during the first half of the 1990s. This experimental variation is used to help identify the effects of welfare changes from the effects of the EITC expansions and the effects of local labor market conditions over this same period. We use a variety of county-level labor market indicators to account for the influence that the local labor market had on the employment rates of heads of households in the CWPDP sample. We also exploit a change in the EITC in 1994 when the credit became significantly more generous for families with two or more children, relative to families with only one child. Our evidence is consistent with the EITC having large, positive effects on employment of adults from welfare families in California .
This paper appears as Chapter 3 in the edited volume The Incentives of Government Programs and the Well-Beings of Families.
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