The EITC and the Extensive Margin: A Reappraisal

204 Pages Posted: 30 Oct 2019 Last revised: 3 Mar 2023

See all articles by Henrik Kleven

Henrik Kleven

Princeton University - Princeton School of Public and International Affairs

Date Written: October 2019

Abstract

A strong consensus posits that the Earned Income Tax Credit (EITC) has had sizable effects on extensive margin labor supply, especially for single mothers. This paper reappraises the difference-in-differences and event study approaches that underpin much of this consensus. The paper investigates every EITC reform at the state and federal level since the inception of the policy. All reforms are analyzed in an event study framework and a comprehensive analysis of model uncertainty is presented. Apart from the federal 1993 reform, EITC expansions are not associated with any clear and robust effects on employment. Treatment impact estimates from about 500 event studies are symmetrically distributed around zero. Specifications with large elasticities are outliers in the distribution. The 1993 reform, on the other hand, is associated with large employment increases for single mothers. Based on a number of different analyses, the paper shows that these increases align more closely with confounding effects from welfare reform and the macroeconomy than with the EITC. Overall, difference-in-differences and event study analyses of EITC reforms are fragile to specification choices and do not support robustly large effects.

Suggested Citation

Kleven, Henrik, The EITC and the Extensive Margin: A Reappraisal (October 2019). NBER Working Paper No. w26405, Available at SSRN: https://ssrn.com/abstract=3476485

Henrik Kleven (Contact Author)

Princeton University - Princeton School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

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