A paper by Nada Eissa and Jeffrey Liebman (1996) examines the impact of the Tax Reform...

   

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A paper by Nada Eissa and Jeffrey Liebman (1996) examines the impact of the Tax Reform Act of 1986 (TRA86), which included an expansion of the earned income tax credit (EITC), on the labor force participation of single women with children. The EITC provides a wage subsidy to low-wage workers with children. The researchers identify the impact of TRA86 by using a quasi-experimental framework: they compare the change in labor supply of single women with children (the "treatment" group) to the change for single women without children (the "control" group). The table below reports the labor force participation rates of single women with and without children before and after TRA86. The table below reports the labor force participation rates of single women with and without children before and after TRA86. Single women with kids Single women without kids 0.952 0.952 Before TRA86 0.729 After TRA86 0.753 1. What percentage of single women with kids is in the labor force before TRA86? What percentage of single women without kids is in the labor force before TRA86? 2. After TRA86, how much more likely are single women without kids to be working than single women with kids? (Hint: Give the percentage point difference.) 3. Why might it be misleading to simply compare the employment rates of single women with children before and after TRA86 and attribute the difference to TRA86? 4. Calculate the "differences-in-differences" estimate of the effect of TRA86 on the labor force participation of single women with kids. 5. How does this empirical strategy differ from a true social experiment? 6. Do these empirical findings support the theoretical predictions of an economic labor supply model? In other words, what does microeconomic theory predict a wage subsidy will do to labor force participation? A paper by Nada Eissa and Jeffrey Liebman (1996) examines the impact of the Tax Reform Act of 1986 (TRA86), which included an expansion of the earned income tax credit (EITC), on the labor force participation of single women with children. The EITC provides a wage subsidy to low-wage workers with children. The researchers identify the impact of TRA86 by using a quasi-experimental framework: they compare the change in labor supply of single women with children (the "treatment" group) to the change for single women without children (the "control" group). The table below reports the labor force participation rates of single women with and without children before and after TRA86. The table below reports the labor force participation rates of single women with and without children before and after TRA86. Single women with kids Single women without kids 0.952 0.952 Before TRA86 0.729 After TRA86 0.753 1. What percentage of single women with kids is in the labor force before TRA86? What percentage of single women without kids is in the labor force before TRA86? 2. After TRA86, how much more likely are single women without kids to be working than single women with kids? (Hint: Give the percentage point difference.) 3. Why might it be misleading to simply compare the employment rates of single women with children before and after TRA86 and attribute the difference to TRA86? 4. Calculate the "differences-in-differences" estimate of the effect of TRA86 on the labor force participation of single women with kids. 5. How does this empirical strategy differ from a true social experiment? 6. Do these empirical findings support the theoretical predictions of an economic labor supply model? In other words, what does microeconomic theory predict a wage subsidy will do to labor force participation?

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1 Before TRA86 the labor force participation rate of single women with kids is 729 0729 and the labor force participation rate of single women without ... View the full answer