The impact of EITC on education, labor market trajectories, and inequalities

Julien Albertini, Arthur Poirier and Anthony Terriau

No 2036, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

Abstract: As a complement to the federal EITC, some states offer their own EITC, typically calculated as a percentage of the federal EITC. In this paper, we analyze the effect of state EITC on education using policy discontinuities at U.S. state borders. Our estimates reveal that an increase in state EITC leads to a statistically significant drop in high school completion. We then use a life-cycle matching model with directed search and endogenous educational choices, search intensities, hirings, hours worked, and separations to investigate the effects of EITC on the labor market in the long run and along the transitional dynamics. We show that a tax credit targeted at low-wage (and low-skilled) workers reduces the relative return to schooling, thereby generating a powerful disincentive to pursue long-term studies. In the long run, this results in an increase in the proportion of low-skilled workers in the economy, which may have important implications in terms of employment, productivity, and income inequalities.

Keywords: EITC; Education; Human capital; Search and matching; Life cycle (search for similar items in EconPapers)
JEL-codes: D15 E24 H24 I24 J24 J6 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-dge, nep-lma, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: The impact of EITC on education, labor market trajectories, and inequalities (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:gat:wpaper:2036

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