The Interaction of Metropolitan Area Costs and the Federal Earned Income Tax Credit: One Size Fits All?
52 Pages Posted: 19 Apr 2011
Date Written: September 1, 2008
The Federal Earned Income Tax Credit (EITC) contributed to increasing employment rates for single women during the 1990s. This paper expands on what is known about the labor supply response to the EITC by exploiting differences in the cost-of-living faced by potentially eligible recipients in different geographic areas. Using the 1993 EITC expansion, we demonstrate that the labor supply response varies considerably with metropolitan area cost-of-living. We identify an increase in labor force participation among single mothers of as much as 10 percentage points in the lowest-cost metropolitan areas. There is no discernable participation response in metropolitan areas with the highest housing costs, where approximately 40 percent of the population lives. We find little response along the intensive margin, regardless of the costs in the metropolitan area. We conclude that the welfare-enhancing effects of the EITC are undermined by the interaction of the program’s fixed national rules and geographic variation in wages and cost-of-living. In addition, our findings suggest that the federal EITC does little to reduce joblessness in many of the nation’s largest cities.
Keywords: EITC, Cost-of-Living, Tax Reform, Labor Supply
JEL Classification: H24, H31, I31, J22, R23
Suggested Citation: Suggested Citation