The Impact of EITC on Education, Labor Market Trajectories, and Inequalities

GATE WP 2036 – December 2020

72 Pages Posted: 21 Feb 2021

See all articles by Julien Albertini

Julien Albertini

University of Lyon 2

Arthur Poirier

Université du Maine - Groupe d' Analyse des Itineraires et Niveaux Salariaux (GAINS)

Anthony Terriau

Université du Maine - Groupe d' Analyse des Itineraires et Niveaux Salariaux (GAINS)

Date Written: December 18, 2020

Abstract

As a complement to the federal EITC, some states offer their own EITC, typically calculated as a percentage of the federal EITC. In this paper, we analyze the effect of state EITC on education using policy discontinuities at U.S. state borders. Our estimates reveal that an increase in state EITC leads to a statistically significant drop in high school completion. We then use a life-cycle matching model with directed search and endogenous educational choices, search intensities, hirings, hours worked, and separations to investigate the effects of EITC on the labor market in the long run and along the transitional dynamics. We show that a tax credit targeted at low-wage (and low-skilled) workers reduces the relative return to schooling, thereby generating a powerful disincentive to pursue long-term studies. In the long run, this results in an increase in the proportion of low-skilled workers in the economy, which may have important implications in terms of employment, productivity, and income inequalities.

Keywords: EITC, Education, Human capital, Search and matching, Life cycle

JEL Classification: D15, E24, H24, I24, J24, J6

Suggested Citation

Albertini, Julien and Poirier, Arthur and Terriau, Anthony, The Impact of EITC on Education, Labor Market Trajectories, and Inequalities (December 18, 2020). GATE WP 2036 – December 2020 , Available at SSRN: https://ssrn.com/abstract=3751443 or http://dx.doi.org/10.2139/ssrn.3751443

Julien Albertini (Contact Author)

University of Lyon 2 ( email )

Arthur Poirier

Université du Maine - Groupe d' Analyse des Itineraires et Niveaux Salariaux (GAINS) ( email )

72085 Le Mans Cedex 9
France

Anthony Terriau

Université du Maine - Groupe d' Analyse des Itineraires et Niveaux Salariaux (GAINS) ( email )

72085 Le Mans Cedex 9
France

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