Single Mothers and The Earned Income Tax Credit: Insurance Without Disincentives?

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 29.04.2014, 12:15 - 13:30


Presentation by 

Nicole B. Simpson (Colgate University)


The Earned Income Tax Credit (EITC) is the single most important transfer program in place in the U.S. An important feature of the EITC is to protect households against risks to both wages and changes in family structure faced by its primary class of recipients: single mothers. This insurance aspect of the program has received little attention thus far. Our study is novel in being the fi rst to provide a quantitative statement about the insurance provided by the EITC. We create a dynamic framework featuring wage and demographic risk that allows for savings by households. We then compare outcomes under the EITC to the counterfactual in which it is completely eliminated. We find that the EITC provides substantial insurance to young single mothers: the program reduces consumption volatility by 12 percentage points as measured by the coefficient of the variation, even as it allows households to save less. Interestingly, this insurance does not compromise incentives to work. We fi nd the EITC increases labor supply substantially at the extensive margin.

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