Poster Paper:
The Earned Income Tax Credit, Maternal Labor Supply and Child Skill Formation
*Names in bold indicate Presenter
Given the limited evidence that EITC improves children's cognitive achievements, which mainly based on instrumental variable (IV) approach where exogenous variations come from (i) federal-level major expansions in the 1990s, (ii) state-level differences across time and regions, (iii) family structure differences (number of eligible children particularly), it remains unclear how exactly this program has positive effect given that different channels have opposite directions, leading to the theoretically ambiguous net effect. On the one hand, eased budget constraint could lead to higher goods investment in children, which helps child development. On the other hand, policy-driven maternal labor supply change, especially inducing single mothers to join the labor force, could potentially reduce maternal time input in children, which could impair child development. The availability of non-parental care which mother could purchase in the market further complicates the case since the productivity of goods, maternal time, non-parental child care remains empirically unclear, e.g. the potential substitutability and complementarity.
Moreover, there is further debate in the literature on so-called ``window of opportunity''. Some studies have found that effects are concentrated among younger children (Dahl and Lochner (2012), Maxfield (2013), Michelmore (2013)), but others have found the opposite (Chetty et al. (2011), Manoli and Turner (2014), Bastian and Michelmore (2018)). The resolution has important implications for theories of child development.
In order to better to these questions, we need a model which (i) incorporate different channels explicitly, which allows us to quantify each effect, and (ii) captures children's dynamic skill formation. Therefore, this paper builds on literature from EITC and social safety nets, life-cycle female labor supply, and skill formation in early childhood, and builds a dynamic structural model to quantify the magnitudes of different mechanisms through which EITC affect child development and household welfare, which is not feasible in reduced-form approach. Several key features of the structural model: (i) a single mother would choose her labor supply, time input in children, non-parental child care, and other welfare program participation decisions in each period; (ii) mother's utility maximization problem is nested with a child's skill production function with a flexible translog form; (ii) both the federal level and state level EITC enter mother's budget constraint.
The structural model will then be identified and estimated by using Methods of Simulated Moments (MSM) based on the Panel Study of Income Dynamics (PSID). The estimated model would allow me to first quantify the effect of EITC on children's skill formation. Furthermore, policy counterfactuals will be conducted ultimately, leading to better evidence-based policy implications. For example, both subsidy rate and phase-out rate, as well as the maximum amount of credit could be altered differently. Another potential policy simulation would be to link the credit with children's age specifically.
