The Earned Income Tax Credit, Welfare Reform, and the Employment of Low Skill Single Mothers Strategies for Improving Economic Mobility Of Workers November 15-16, 2007 Hilary W. Hoynes Professor, University of California, Davis and NBER 1
Overview • Employment of single mothers with children increased dramatically in the 1990s • Incentives to work increased substantially during this period: – Push factor: welfare reform – Pull factor 1: EITC expansion – Pull factor 2: strong labor market, rising wages • How did these forces contribute to the increase in the employment of single mothers with children? 2
Percent of Women Working ( by Marital Status and Children) 100% 95% Percent employed at all last year 90% 85% 80% 75% 70% Single, No Children Married, No Children 65% Single, Children Married, Children 60% 1983 1986 1989 1992 1995 1998 2001 2004 On the eve of these policy changes, much attention is given to low employment rates of single mothers. 3
Percent of Women Working ( by Marital Status and Children) 100% 95% Percent employed at all last year 90% 85% 80% 75% 70% Single, No Children Married, No Children 65% Single, Children Married, Children 60% 1983 1986 1989 1992 1995 1998 2001 2004 Beginning in 1992—dramatic increases in employment for single mothers, with little change for other women 4
Brief description of policy changes 1) Welfare reform 2) Expansion in the Earned Income Tax Credit 5
Welfare Reform • Long standing concern of AFDC: high benefit reduction rate creates disincentives to work. • Two periods of change – State waivers (1992-1996): voluntary changes to AFDC – Federal reform (1996): Mandates elimination of AFDC, replacement with TANF • Emphasis in reform on increasing employment and reducing welfare caseloads through: – Time limits – Work requirements – Increasing financial returns to work 6
AFDC/TANF Caseloads 6 5 Millions of Families 4 3 2 1 0 1970 1975 1980 1985 1990 1995 2000 2005 7
The Rise of the Earned Income Tax Credit • The EITC is an earnings subsidy that is provided through the federal tax system • Refundable tax credit for working low income families with children • The EITC has increased in importance through policy expansions in 1986, 1990, and 1993 • Redistributes income to disadvantaged families while subsidizing work 2007 EITC for Single Parents Maximum Credit Eligible at incomes up to 1 child $2,853 $33,241 2+ children $4,716 $37,783 8
EITC Costs now exceed AFDC/TANF $50 $40 $2006 Billions $30 $20 AFDC/TANF Expenditure $10 EITC Expenditure $0 1975 1980 1985 1990 1995 2000 2005 9
EITC Benefit Structure, Single mothers in 2007 $5,000 Substantially larger $4,000 credit for families with Flat 2+ children Credit Amount (2006$) Region $3,000 Phase in Phase out Region Region $2,000 $1,000 $0 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 Earned Income 2006$ One Child Two or more Children 10
Real EITC Benefits Increasing over Time $5,000 2006 [After OBRA93] 1993 [After OBRA90] $4,000 1988 [After TRA84] 1984 [Before TRA86] Credit Amount (2006$) $3,000 $2,000 $1,000 $0 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 Earnings 2006$ 11
12 Now back to the employment figure …
Percent of Women Working ( by Marital Status and Children) 100% 95% Percent employed at all last year 90% 85% 80% 75% 70% Single, No Children Married, No Children 65% Single, Children Married, Children 60% 1983 1986 1989 1992 1995 1998 2001 2004 13
• These increases are large: 16 percentage point increase in employment rates between 1992 and 1999. • The increases are even larger—20 percentage points— if you look at single mothers with a high school education or less (who are more likely to be affected by the EITC and welfare reform) • No other group (male or female) experienced a change like this. 14
Explanations for increasing employment of single mothers • Difficult to decompose influences of: EITC expansion, welfare reform and strong labor market – Each are expected to increase employment – They occurred at (largely) the same time • Overwhelming evidence that all three factors matter • Very consistent results across studies using different methodologies • Work by Meyer and Rosenbaum (2001) shows that – 1992–1996 employment gains: 35% due to EITC, 20% due to welfare reform – 1984–1996 employment gains: 60% due to EITC, 15% due to welfare reform 15
Conclusions • The last decade has seen major shifts in government assistance for single mothers – Decline in cash welfare benefits for non-workers – Rise in tax-based benefits for workers • Employment rates of single mothers increased dramatically during this period • The research uniformly shows that welfare reform and the expansion of the EITC contributed to this increase in employment 16
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