Association for Public Policy Analysis & Management

While the EITC provides a disincentive to work for most married women, previous research suggests that it offers an overall incentive to report self-employment earnings for all recipients (LaLumia 2009).  Using the Survey of Income and Program Participation, we use variation in EITC generosity across states between 1996 and 2012 to estimate the impact of the credit on married mothers’ self-employment behavior.  Specifically we find that a 10 percent increase in the average predicted EITC receipt increases the proportion of married mothers who report positive self-employment hours by 0.5 percentage points, or 5 percent.  The same increase in EITC results in a 0.9 percentage point decline in the proportion of married mothers reporting positive wage and salary hours.  Our results are consistent with previous evidence suggesting that increases in the EITC lead to lower employment among married mothers, but we provide new evidence that the EITC induces married mothers to change their employment type.   The response in monthly self-employment hours suggests that the EITC induces a real increase in self-employment behavior rather than only a reporting response.  This observed shift towards self-employment could arise from an alleviation of credit constraints, a desire for flexible work, or an attempt to maximize the size of the credit through targeted changes in reporting and labor supply.