The Next Stage for Social Policy:

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Abstract

The Earned Income Tax Credit enjoyed marked success bringing low-income women into the labor force in recent years. At the same time, labor force participation by low-income or less-education men stagnated, and declined among young black men. In response to these labor market conditions, this paper analyzes several EITC reform options directed at increasing the EITC for low-income workers, in the hopes of drawing these men into the labor force. We estimate the cost of various proposals and put forth an additional proposal that breaks the EITC into two components one focused on individual workers and one focused on supporting children.

Introduction

Since the early 1990s, the labor force participation of low-income women has risen dramatically (Blank 2002). This has been particularly true among African American single mothers. Analysts generally attribute this rise in work activity to welfare reform, the strong economy of the 1990s, and several income supplements for the working poor such as expansion of the earned income tax credit (EITC).

Over the same period, labor force activity among low-income or less-educated young men stagnated, and it declined significantly among young black men. According to Holzer and Offner (2006), labor force participation rates among black men age 16-24 not enrolled in school and with a high school diploma or less education declined from 77 percent in 1989 to 68 percent in 1999-2000; the rates among those age 25-34 declined as well (from 87 to 84 percent). If anything, these measured declines understate the actual declines, because they are based only on the noninstitutional population; the rising incarceration rates for young black men over this period implies an additional large number of nonemployed men not captured in the official statistics (Western and Pettit 2000).

This lack of labor force activity among such large numbers of young men imposes large individual and societal costs. Lack of early employment leads to lower wages and employment levels for these young men as they age (Ellwood 1982; Neumark 2002), since they fail to accumulate the work experience that generates much early wage growth. If these young men engage in crime and become incarcerated as a result of their low earning potential, their future employment prospects will be further reduced (Holzer et al. 2007); and, their crime will impose enormous costs on the United States, in victim costs as well as the costs of administering the criminal justice system (Ludwig 2006). Further, low work effort and participation in crime almost certainly reduce the marriage prospects of these young men (Wilson 1987). Since most of these men eventually become noncustodial fathers, their lack of work and earnings reduces the family incomes available to their children, raising their poverty rates and imposing huge economic costs on them and on the United States overall (Holzer et al. 2007).

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