Removing work requirement from California child tax credit doesn't cause parental labor drop, study finds
Removing work requirement from California child tax credit doesn't cause parental labor drop, study finds
Providing child tax benefits to low-income parents without earnings may not substantially reduce their employment, suggests a new NBER working paper, Child Tax Benefits and Labor Supply: Evidence from California by Jacob Goldin, Tatiana Homonoff, Neel A. Lal, Ithai Lurie, and Katherine Michelmore.
Why it matters: A stated concern about expanding refundable tax credits like the Child Tax Credit (CTC) is that it could discourage parental work if parents no longer need earned income to get the benefit. But this study indicates those labor supply worries (if they were legitimate in the first place) may be overblown.
How they did it: The researchers analyzed California's Young Child Tax Credit (YCTC), a refundable $1,000 state credit introduced in 2019 for low-income parents of children under age 6.
From 2019-2021, the YCTC had a work requirement - parents needed at least $1 of annual earned income to get the full flat $1,000.
In 2022, California removed the work requirement, letting even zero-income parents claim the credit.
Using administrative tax data and a regression discontinuity design based on childbirth timing around the YCTC's age cutoff, the authors compared the labor force participation of moms with kids who just barely qualified vs. just barely aged out, before and after the work requirement was eliminated.
What they found: Lifting the work requirement caused at most a 0.35 percentage point decline in maternal employment, and the 95% confidence interval included no change at all.
Their main specification estimates a statistically insignificant 0.06 pp drop.
The implied elasticity is 0.01, meaning a 1% reduction in the return to work causes a 0.01% employment decrease. The lower bound estimate yields an elasticity of 0.06.
A supplementary analysis of moms on Medicaid, including some without prior-year earnings, finds no significant employment effect.
Extrapolating to the temporary CTC changes in 2021, which removed the phase-in and made the credit fully refundable, predicts at most 155,000 parents would exit the labor force - far below prior estimates of 350,000 to 1.5 million.
The big picture: The results suggest expanding tax benefits for low-income children need not meaningfully reduce labor force participation, the authors conclude. However, they note the labor supply effects of a permanent federal CTC expansion could differ from a state-level change.
Methodology: The YCTC's eligibility age cutoff and flat benefit structure enable the researchers to isolate the impact of making the credit's work requirement stricter while holding the benefit structure and amount constant. Their main estimates come from an empirical specification chosen, based on placebo tests, to maximize precision.