The Impacts of the Earned Income Tax Credit and Welfare Reform on the Low-skilled Labor Market

This dissertation examines the impacts of the Earned Income Tax Credit (EITC) and welfare reform on the low-skilled labor market with a focus on three issues: first, whether the positive employment effects associated with the EITC and welfare reforms in the 1990s are due to increases in the labor market entry among non-workers or by fewer transitions out of the labor market among workers; second, whether these program changes have shortened unemployment durations; and third, whether the policy reforms have lengthened employment spells. The three topics offer a new perspective to look at these well-regarded anti-poverty programs and are important for understanding their overall effectiveness among people with different degrees of labor market attachment. Focusing empirically on the 1993 EITC expansion and the 1992–1996 welfare reforms, I apply a differences-in-differences framework and find that the EITC increases employment among low-educated unmarried mothers by six percentage points. Approximately 70 percent of this effect can be attributed to fewer labor market exits and only 30 percent to additional entries. Welfare reforms, in contrast, increases employment by 7.4 percentage points, entirely through increased entry. These findings indicate that while the tax credit is more successful at keeping workers attached to the labor market, the direct work requirements and time limits seen in welfare reform are more effective at inducing labor market entry. Using a continuous time duration model, I find the 1993 EITC expansion does not affect lengths of unemployment spells, while welfare reforms in the 1990s help low-skilled single mothers become 35.2% more likely to escape unemployment spells relative to childless women. On the other hand, I find that the EITC expansion is effective at extending employment durations, whereas welfare reforms are not. Evidence shows that the EITC lowers the hazard rate of leaving employment by about 13% for women with children relative to those without children. And the effect is about the same for women with 2+ children relative to those with only 1 child. Yet, welfare reforms show no effect on lengthening employment spells.