State Earned Income Tax Credits and Participation in Regular and Informal Work

Abstract

This paper examines how low-income single parents alter their regular and informal labor supply in response to the EITC. Variation in state EITCs from 1997–2005 identifies changes in informal and regular labor supply of unmarried low-income parents in response to tax credits. Single fathers’ informal-sector participation declines by 7.3 percentage points, conditional on working in the regular sector, if a state EITC increases by 10 percent of the federal credit. Regular-sector hours worked per week increase by 4.5 and informal-sector hours per week fall by 2.2 with no significant effect on total hours.

Keywords: informal economy, earned income tax credit

JEL Classification: H3, J2