The US earned income tax credit, its effects, and possible reforms

In this paper, I first summarize how the US Earned Income Tax Credit (EITC) operates and describe the characteristics of recipients. I then discuss empirical work on the effects of the EITC on poverty and income distribution, and its effects on labor supply. Next, I discuss a few policy concerns about the EITC: possible negative effects on hours of work and marriage, and problems of compliance with the tax system. I then briefly discuss some possible reforms to the structure of the current EITC.Welfare reform; Earned income tax credit; EITC; Earnings subsidies; Tax credits; Poverty

Trends in Self-Employment Among White and Black Men: 1910-1990

We examine trends in self-employment among white and black men from 1910 to 1990 using Census and CPS microdata. Self-employment rates fell over most of the century and then started to rise after 1970. For white men, we find that the decline was due to declining rates within industries, but was counterbalanced somewhat by a shift in employment towards high self-employment industries. Recently, the increase in self-employment was caused by an end to the within industry decline and the continuing shift in employment towards high self-employment industries. We find that the trends in self-employment average returns do not easily explain the decline in self-employment from 1950 to 1970, nor the increase from 1970 to 1990. We also find that changes in tax rates, social security benefits, and immigration patterns do not explain the recent upturn in self-employment. For black men, we find that the self-employment rate remained at a level of roughly one-third the white rate from 1910 to 1990. The large and constant gap between the black and the white rates is not due to blacks being concentrated in low self-employment rate industries, but is consistent with job opportunities outside of self-employment increasing relative to those in self-employment. However, more recently the relative earnings of blacks in self-employment rose more than relative earnings for whites the near constancy of the relative self-employment rates more surprising. We also find that absent continuing forces holding down black self-employment, a simple inter-generational model of self-employment suggests that black and white rates would converge quickly.

The Effects of Welfare and Tax Reform: The Material Well-Being of Single Mothers in the 1980s and 1990s

The tax and welfare programs that provide income and in-kind benefits to single mothers have changed dramatically in recent years. These changes began as far back as the mid-1980s and culminated with the 1996 welfare law that 'ended welfare as we knew it.' These tax and welfare changes have sharply increased the employment of single mothers and cut welfare rolls. However, little is know about the effects of these policy changes on the living conditions of single mothers and their children. Studies of those leaving welfare have found that a substantial percentage have problems paying rent, purchasing enough food, and paying utility bills. Other studies have found a decline in income among the worst-off single mothers. The goal of this paper is to examine the material well-being of single mothers and their families before and soon after welfare reform. Using data from two nationally representative household surveys we examine the consumption patterns of single mothers and their families. We find that the material conditions of single mothers did not decline in recent years, either in absolute terms or relative to single childless women or married mothers. In most cases, our evidence suggests that the material conditions of single mothers have improved slightly, even for highly disadvantaged single mothers.

Labor Supply Effects of Social Insurance

This chapter examines the labor supply effects of social insurance programs. We argue that this topic deserves separate treatment from the rest of the labor supply literature because individuals may be imperfectly informed as to the rules of the programs and because key parameters are likely to differ for those who are eligible for social insurance programs, such as the disabled. Furthermore, differences in social insurance programs often provide natural experiments with exogenous changes in wages or incomes that can be used to estimate labor supply responses. Finally, social insurance often affects different margins of labor supply. For example, the labor supply literature deals mostly with adjustments in the number of hours worked, whereas the incentives of social insurance programs frequently affect the decision of whether to work at all. The empirical work on unemployment insurance (UI) and workers' compensation (WC) insurance finds that the programs tend to increase the length of time employees spend out of work. Most of the estimates of the elasticities of lost work time that incorporate both the incidence and duration of claims are close to 1.0 for unemployment insurance and between 0.5 and 1.0 for workers' compensation. These elasticities are substantially larger than the labor supply elasticities typically found for men in studies of the effects of wages or taxes on hours of work. The evidence on disability insurance and (especially) social security retirement suggests much smaller and less conclusively established labor supply effects. Part of the explanation for this difference probably lies in the fact that UI and WC lead to short-run variation in wages with mostly a substitution effect. Our review suggest that it would be misleading to apply a universal set of labor supply elasticities to these diverse problems and populations.

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

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.

Unemployment Insurance, Recall Expectations, And Unemployment Outcomes

This paper shows the importance of explicitly accounting for the possibility of recalls when analyzing the determinants of unemployment spell durations and the effects of unemployment insurance (UI) on unemployment outcomes in the United States. These issues are examined using a unique sample of UI recipients from Missouri and Pennsylvania covering unemployment spells in the 1979- 1981 period. We find that those expecting recall who are not recalled tend to have quite long unemployment spells. Furthermore, ex-ante temporary layoff spells (the spells of individuals' who initially expect to be recalled) may account for over 60 percent of the unemployment of UI recipients and appear to account for much more unemployment than ex-post temporary layoff spells (spells actually ending in recall). We estimate a competing risks model in which the finding of a new job and recall are treated as alternate routes of leaving unemployment. Our results using this approach show that the recall and new job exit probabilities have quite different time patterns and are often affected in opposite ways by explanatory variables. We also find that the probability of leaving unemployment (both through recalls and new job finding) increases greatly around the time that UI benefits lapse.

The Impact of the Potential Duration of Unemployment Benefits on the Duration of Unemployment

This paper uses two data sets to examine the impact of the potential duration of unemployment insurance (UI) benefits on the duration of unemployment and the time pattern of the escape rate from unemployment in the United States. The first part of the empirical work uses a large sample of household heads to examine differences in the unemployment spell distributions of UI recipients and nonrecipients. Sharp increases in the rare of escape from unemployment both through recalls and new job acceptances are apparent for UI recipients around the time when benefits are likely to lapse. The absence of such spikes in the escape rate from unemployment for nonrecipients strongly suggests that the potential duration of UI benefits affects firm recall policies and workers' willingness to start new jobs. The second part of our empirical work uses administrative data to examine the effects of the level and length of UT benefits on the escape rate from unemployment of UI recipients. The results indicate that a one week increase in potential benefit duration increases the average duration of the unemployment spells of UI recipients by 0,16 to 0.20 weeks. The estimates also imply that policies that extend the potential duration of benefits increase the mean duration of unemployment by substantially more than policies with the same predicted impact on the total UI budget that raise the level of benefits while holding potential duration constant.

Further Results on Measuring the Well-Being of the Poor Using Income and Consumption

In the U.S., analyses of poverty rates and the effects of anti-poverty programs rely almost exclusively on income data. In earlier work (Meyer and Sullivan, 2003) we emphasized that conceptual arguments generally favor using consumption data to measure the well-being of the poor, and, on balance, data quality issues favor consumption in the case of single mothers. Our earlier work did not show that income and consumption differ in practice. Here we further examine data quality issues and show that important conclusions about recent trends depend on whether one uses consumption or income. Changes in the distribution of resources for single mothers differ sharply in recent years depending on whether measured by income or consumption. Measures of overall and sub-group poverty also sharply differ. In addition to examining broader populations and a longer time period, we also consider new dimensions of data quality such as survey and item nonresponse, imputation, and precision. Finally, we demonstrate the flaws in a recent paper that compares income and consumption data.

The Health Care Safety Net and Crowd-Out of Private Health Insurance

There is an extensive literature on the extent to which public health insurance coverage through Medicaid induces less private health insurance coverage. However, little is known about the effect of other components of the health care safety net in crowding out private coverage. We examine the effect of Medicaid and uncompensated care provided by clinics and hospitals on insurance coverage. We construct a long panel of metropolitan area and state-level data on hospital uncompensated care and free and reduced price care offered by Federally Qualified Health Centers. We match this information to individual level data on coverage from the Current Population Survey for two distinct groups: children aged 14 and under and single, childless adults aged 18 to 64. Our results provide mixed evidence on the extent of crowd-out. Hospital uncompensated care does not appear to crowd-out health insurance coverage and health center uncompensated care appears to crowd-out private coverage for adults and, in some specifications, children.