EITC Expansion and Labor Supply
U.S. Treasury / NBER researchers · United States · 1993
Summary
The EITC expansion of 1993 constitutes one of the most studied natural experiments in labor economics. Researchers using difference-in-differences designs consistently find large increases in labor force participation among low-income single mothers — the targeted population — with effects concentrated in the phase-in range where each additional dollar earned increases the credit. The EITC is distinctive among welfare programs in that it rewards work, creating positive rather than negative labor supply incentives. Multiple replication studies using different methods and comparison groups have confirmed the core finding.
Research question
"How does expanding the Earned Income Tax Credit affect labor force participation among low-income single mothers?"
Methodology
Intervention
1993 EITC expansion increased maximum credit from $953 to $3,110 for families with two or more children; natural experiment from policy discontinuity
Assignment
Difference-in-differences (single mothers vs. childless women pre/post expansion)
Sample size
CPS data: ~200,000 observations over 1985–1997
Primary outcome
Labor force participation; hours worked
Effect estimate
Labor force participation of single mothers increased 7.2 percentage points; among single mothers with less than high school education, +8.7pp
Decision
EITC further expanded in subsequent legislation; became largest cash transfer program for working-age adults in U.S.
Result
Positive
Labor force participation of single mothers increased 7.2 percentage points; among single mothers with less than high school education, +8.7pp
Evidence strength
Moderate
Quasi-experimental design with replication support.
Replication status
Replicated
Institution
U.S. Treasury / NBER researchers
Location
United States
Year
1993
Policy area
Tax & Revenue
Mechanism
Price signal