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New Research: EITC Boosts Employment; Lifts Many More Out of Poverty Than Previously Thought

July 23, 2015 at 6:00 PM

The Earned Income Tax Credit’s impact in reducing poverty is even greater than previously recognized, due to its strong effect in bringing more single mothers into the labor force, striking new research released last week shows.

Standard estimates of the Earned Income Tax Credit’s (EITC) anti-poverty impact measure the number of people the EITC lifts out of poverty by simply comparing families’ incomes with the EITC to their incomes without it.  These estimates find the EITC lifted 6.2 million people — including 3.2 million children — out of poverty overall in 2013, an impressive achievement. 

Research has long established, however, that the EITC has strong effects in inducing more people to enter the labor market.  And in their new analysis, Hilary Hoynes, a University of California at Berkeley economist who is one of the nation’s leading researchers on these issues, and the Treasury Department’s Ankur Patel, take this factor into account (as, for example, the Congressional Budget Office and Joint Tax Committee do when they evaluate the effects of various programs and policy changes).

The research in the field demonstrates that the EITC has particularly large effects in increasing employment (and reducing welfare use) among single female parents.  A leading study found, for example, that EITC increases enacted in the 1990s were the single largest factor behind the impressive increase in employment among single mothers in that decade — larger, in fact, than the employment gains attributed to the 1996 welfare law.  Hoynes and Patel find that when the income gains from the increase in employment the EITC generates among that group are taken into account, the EITC’s impact in reducing poverty is considerably larger than earlier understood.

Studying single women aged 24-48 who have children and lack a college degree, Hoynes and Patel find that when the EITC’s employment and consequent earnings effects are taken into account, the number of people in such families that the EITC lifts out of poverty nearly doubles.  Relatedly, they find (based on analysis of the employment effects of past major EITC expansions) that a $1,000 increase in the EITC for these single mothers leads to an estimated 7.3 percentage-point increase in employment and a 9.4 percentage-point drop in the share of families below the poverty line.  These are large effects.

Hoynes and Patel examined these women and children, not EITC beneficiaries as a whole, so they could not similarly estimate the extent to which the EITC’s employment and related earnings effects increase the overall number of people the EITC lifts out of poverty.  They do offer a rough estimate, however:  based on the anti-poverty impacts they find with respect to the mothers and children they examined, they estimate that the standard estimate of the total number of people the EITC lifts out of poverty may understate the true number by “as much as 50 percent.”

As Hoynes and Patel note, their findings do not reflect two additional effects, which go in opposite directions from one another.  On the one hand, by inducing more people to enter the labor force, the EITC increases the number of people looking for jobs, which may place some downward pressure on market wages (since more workers are looking for jobs).  On the other hand, a growing body of research finds that low-income children whose families receive the EITC have better health and higher school test scores and educational attainment, on average, which in turn is linked to increased earnings and employment — and, thus, likely lower rates of poverty — in adulthood.

These new research findings have significant policy implications.  First, they underscore the importance of making permanent the key features of the EITC and the low-income component of the Child Tax Credit (which is similar to the EITC in nature because it’s limited to people who work and it phases up as earnings increase) that are set to expire at the end of 2017.  If policymakers fail to maintain these provisions, millions of parents and children will be pushed into, or deeper into, poverty — and these work-based tax credits’ impact in boosting employment will likely be lessened to some degree.

Second, to extend the EITC’s employment-increasing effects to more low-income adults — including young men from low-income backgrounds, who have low labor-force participation rates — policymakers should substantially enlarge the very small EITC for workers who are childless adults or non-custodial parents, as both President Obama and House Ways and Means Committee Chairman Paul Ryan have proposed.  Adding to the importance of these proposals is the fact that single individuals who work for low wages are the only group who are actually taxed into, or deeper into, poverty by the federal tax system.  A stronger EITC for these workers would help address this undesirable outcome.

Third, to mitigate the EITC’s potential downward effects on wage levels and to boost families’ incomes, policymakers should significantly raise the minimum wage — which is now well below its levels of past decades, both in real terms and as a percentage of the median wage.  Institutions ranging from the International Monetary Fund to the Economic Policy Institute, as well as CBPP, have emphasized that the EITC and the minimum wage complement each other — and work best when both are strong.