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TAX CREDITS &

LABOUR SUPPLY

QUESTION:  What are the theoretical and empirical effects of the Working Family Tax Credit on hours worked and labour force participation?  What problems have researchers encountered when estimating labour supply responses? How have they solved them? .

Brewer et al. 2006) . UK: Modelling and computer simulation (Blundell.OUTLINE  Working Family Tax Credit (WFTC)  Introduction  Theoretical  & Empirical Impact: Increased LFPR 3 methods of evaluation – problems and solutions  SSP. 2001. 1996)  EITC. 1996)  WFTC. Canada: Natural Experiment (Card & Robbins. US: Diff-in-diff (Eissa & Liebman.

replaced Family Credit (1980)  Increased generosity: ↑ threshold. ↓ benefit reduction rate. phase-in rate Introduced in 1999. childcare costs .WORKING FAMILY TAX CREDIT  In-work means-tested benefit for families with children  One adult working min 16 hours  Threshold: £90 per week  Benefit reduction rate: 55%  Inclusion of childcare credit: 70% of childcare costs  Similar to EITC in the US  Difference:  eligibility criteria.

↑ due to SE) Newly eligible single parents Hours worked ↓ (SE. IE) Second earners of couples on benefit Ambiguous effect on hours worked (↓ due to IE. IE) Could lead to LFPR↓ Second earners of newly eligible couple .THEORETICAL IMPACT MOVING FROM FC TO WTFC Group Theoretical Non-working households LFPR↑ (SE) Single parents on benefit Ambiguous effect on hours worked (↓ due to IE. ↑ due to SE) Could lead to LFPR↓ Hours worked ↓ (SE.

1% for married women and men (partner not working) .EMPIRICAL IMPACT Hours worked for married women (partner working): – 0.18 hours  Brewer et al (2006):  + 5.06% and +2.5% for single parents  +0.

#1 EXPERIMENT. CARD & ROBBINS (1996) .SELF SUFFICIENCY PROGRAM (CANADA) Population: ~6000 single parents who have received welfare for at least 12 months  Treatment Group: half of the population selected to take part in the SSP. which lasted for 3 yrs  Participation conditional on working full-time (>30 hours) and not receiving income assistance within a year of being offered the SSP  Compare outcomes for T and C groups to isolate labour supply responses due to SSP  .

1996) .EFFECT OF SSP ON FULL TIME EMPLOYMENT (CARD & ROBBINS.

SELF SUFFICIENCY PROGRAM (CANADA) IS THE EVALUATION SOUND? YES • Random Assignment – C and T are not systematically different NO (Problems) • Non-compliance of treated (only 30% participated) – introduce new selection bias? • Solution: Control for demographic characteristics • Differential rates of response for T and C group. and rates vary by treatment status and employment status • Solution: Assign different types of individuals different weights to get a more representative sample .

income etc. T3: Single mothers who are likely to be eligible for EITC.EARNED INCOME TAX CREDIT (US) YES • T1: Single mothers.) • Switching from C to T – single women incentivized to have children to be eligible for EITC . LS responses are due solely to EITC if parallel trends assumption holds NO (Problems) • Parallel trends assumption doesn’t hold • Solution: Use 2 alternative treatment groups: • T2: Low education single mothers. C3: single mothers with more than high school ed • Control for demographic characteristics (age. • C2: Low ed single women. EISSA & LIEBMAN (1996) . C1: Single women.#2 DIFF-IN-DIFF.

#3 MODELLING & SIMULATING. BLUNDELL (2001). childcare costs and other fixed costs Careful modelling of preferences for different groups – single parents and couples Data: Family Resources Survey from 1995-2003 . BREWER ET AL (2006) . benefits.WFTC Discrete choice structural approach Careful modelling of each individual’s budget constraint  Simulate budget constraint for each individual Accounts for taxes.

WORKING FAMILY TAX CREDIT (UK) IS THE EVALUATION SOUND? YES • Able to isolate impact of WFTC from all other changes in tax and benefits NO (Problems) • Wages of non-workers not observed • Solution: infer wages from set of similar workers or use wages of similar new entrants • Other functional form assumptions .

presence of confounders and other research problems  Compare estimates with other studies to strengthen one’s case  . determining the exact magnitude of the impact is tricky due to selection bias.CONCLUSION On the whole. there is consensus amongst researchers that WFTC and other tax credit schemes increase work incentives among lowincome  However.