empirical evidence on effect of in-work benefit programs on labour supply
DESCRIPTION
Undergraduate Public Economics Class PresentationA summary of 3 papers by - Card & Robbins- Eissa & Liebman - Blundell et al Evaluating 3 different in-work benefit programs - SSP (Canada)- EITC (US)- WFTC (UK)TRANSCRIPT
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?
OUTLINE Working Family Tax Credit (WFTC)
Introduction Theoretical & Empirical Impact: Increased LFPR
3 methods of evaluation – problems and solutions SSP, Canada: Natural Experiment (Card & Robbins,
1996) EITC, US: Diff-in-diff (Eissa & Liebman, 1996) WFTC, UK: Modelling and computer simulation
(Blundell, 2001; Brewer et al, 2006)
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, phase-in rate
Introduced in 1999, replaced Family Credit (1980) Increased generosity: ↑ threshold, ↓ benefit reduction
rate, childcare costs
THEORETICAL IMPACTMOVING 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)
Newly eligible single parents
Hours worked ↓ (SE, IE)
Second earners of couples on benefit
Ambiguous effect on hours worked (↓ due to IE; ↑ due to SE)Could lead to LFPR↓
Second earners of newly eligible couple
Hours worked ↓ (SE, IE)Could lead to LFPR↓
EMPIRICAL IMPACT
Hours worked for married women (partner working): – 0.18 hours
Brewer et al (2006): + 5.5% for single parents +0.06% and +2.1% for married women and men
(partner not working)
#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
EFFECT OF SSP ON FULL TIME EMPLOYMENT(CARD & ROBBINS, 1996)
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
#2 DIFF-IN-DIFF, EISSA & LIEBMAN (1996) - EARNED INCOME TAX CREDIT (US)
YES
• T1: Single mothers, C1: Single women. 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, T3: Single mothers
who are likely to be eligible for EITC. • C2: Low ed single women, C3: single mothers with
more than high school ed• Control for demographic characteristics (age, income
etc.)
• Switching from C to T – single women incentivized to have children to be eligible for EITC
#3 MODELLING & SIMULATING, BLUNDELL (2001), BREWER ET AL (2006) - WFTC
Discrete choice structural approachCareful modelling of each individual’s budget constraint
Simulate budget constraint for each individual Accounts for taxes, benefits, childcare costs and other fixed costs
Careful modelling of preferences for different groups – single parents and couplesData: Family Resources Survey from 1995-2003
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
CONCLUSION
On the whole, there is consensus amongst researchers that WFTC and other tax credit schemes increase work incentives among low-income
However, determining the exact magnitude of the impact is tricky due to selection bias, presence of confounders and other research problems
Compare estimates with other studies to strengthen one’s case