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A new study by Henrik Kleven, a Princeton economist, concluded that the earned income tax credit (EITC) has done little to induce employment increases among single mothers, attributing the large increases in the late 1990s to welfare reform (a package of policies that redesigned cash welfare in the US) and a strong economy instead. Kleven writes:
“The different analyses I present suggest that the dramatic employment increases in the nineties were driven by welfare reform aided by a favorable business cycle … When investigating the long-run evolution of labor supply for single mothers and doing event studies of other EITC reforms, it is hard to conclude that the EITC has played any major role for the historic extensive margin changes in the U.S. In fact, when merging all of the EITC reforms at the state and federal level in a stacked event study, I obtain a precisely estimated zero.”
Kleven analyzed every change in the EITC at the federal and state level from 1989 through 2018 and considered the effects of welfare reform in 1996 (including state-level waivers that led up to welfare reform) on labor supply for single mothers at the extensive margin, meaning their decisions about working or not. The figure below illustrates the question the study was trying to answer — Why did EITC reforms lead to employment increases only in the late 1990s? Kleven explains that prior research had confounded variations in the EITC by family size with variations in AFDC/TANF. Ultimately, he concludes that welfare reform in the 1990s is a better explanation for the large and sustained increases in single mother employment experienced in the US.
Source: Henrik Kleven, “The EITC and the Extensive Margin: A Reappraisal”, September 2019.
This finding is not new, but welfare reform’s efficacy often is deemphasized in the literature (or dismissed entirely) in favor of the EITC. Arguments that favor the effectiveness of welfare reform over the EITC, such as those by NYU political scientist Larry Mead, get less attention. Instead, in recent years the employment effects of welfare reform are often described as “modest and decreased with time”, leaving the impression that the policy was inconsequential in explaining the large increases in employment among single mothers in the late 1990s. Klevin’s findings will make it increasingly difficult to make this claim.
One reason this matters involves current policy debates. Proposals to increase the EITC for childless workers as a way to address declining labor force participation among prime-age men rely on prior studies describing the EITC’s positive effects on employment among single mothers. As Klevin argues, “[T]he political argument for the EITC has relied heavily on its supposed employment effects. The empirical findings presented here do not lend support to this argument.”
The other reason these findings are important is to counteract suggestions that welfare reform did not benefit single mother employment. The evidence is clear and uncontroversial that it did. Future policy reforms aimed at increasing employment among low-income populations should rely more heavily on policies similar to welfare reform rather than the EITC. As Kleven concluded:
“From this comprehensive and long-run perspective, the EITC has not had any clear effects on labor supply at the extensive margin. Apart from the expansion enacted in 1993, EITC reforms are not associated with increases in the employment of single mothers relative to single women without children. The 1993 reform, on the other hand, is associated with very large employment increases, but these increases align closely with the confounding effects of welfare reform and a booming macroeconomy. Exploiting variation in these confounders across household type, space and time, I have shown that the effects are driven exactly by those affected most strongly by welfare reform and the business cycle.”
A new Princeton study concluded that the earned income tax credit has done little to induce employment increases among single mothers, attributing the large increases in the late 1990s to welfare reform and a strong economy instead.
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