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The Impact Of Tax Credits On Labor Supply

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Executive Summary

One of the principle aims of the Working Families' Tax Credit in the UK was to increase the participation of single mothers. The literature to date concludes there was approximately a five-percentage-point increase in employment of single mothers. The differences-in-differences methodology that is typically used compares single mother with single women without children. However, the characteristics of these groups are very different, and change over time in relative covariates is likely to violate the identifying assumption. The authors find that when they control for differential trends between women with and without children, the employment effect of the policy falls significantly.

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