Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers

Abstract

During 1984-96, welfare and tax policy changed dramatically. The Earned Income Tax Credit was expanded, welfare benefits were cut, welfare time limits were added and cases were terminated, Medicaid for the working poor was expanded, training programs were redirected, and subsidized or free child care was expanded. Many of the program changes were intended to encourage low income women to work. During this same time period there were unprecedented increases in the employment and hours of single mothers, particularly those with young children. In this paper, we first document these large changes in policies and employment. We then examine if the policy changes are the reason for the large increases in single mothers' labor supply. We find evidence that a large share of the increase in work by single mothers can be attributed to the EITC, with smaller shares for welfare benefit reductions, welfare waivers, changes in training programs, and child care expansions. We also find that most of these policies increased hours worked. Our results indicate that financial incentives through the tax and welfare systems have substantial effects on single mothers' labor supply decisions.