Abstract
One of the principle aims of the Working Families’ Tax Credit in the UK was to increase the participation of single mothers in work. The difference-in-differences methodology that is typically used to evaluate tax credit policies compares single mothers with single women without children. However, the characteristics of these groups are very different, and changes over time in relative covariates are likely to violate key identifying assumptions. We find that when we control for differential trends between women with and without children, the employment effect of the policy falls significantly. Moreover, closer inspection shows that while there was an effect on increasing the likelihood to work full-time (30 h or more), there was no effect on reducing the likelihood to be inactive. Looking closely at important covariates before and after the policy introduction, we can see sizeable changes in the relative returns to employment between the treatment and control groups, making it difficult to assess the policy effectiveness.
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Notes
These figures are taken from the “Working Families’ Tax Credit Statistics,” Inland Revenue Quarterly Enquiry (2003).
The basic credit increased progressively from \({\pounds }\)52.30 in 1999/2000 to \({\pounds }\)62.50 by 2002/2003. The bonus credit increased progressively from \({\pounds }\)11.05 in 1999/2000 to \({\pounds }\)11.65 by 2002/2003. The child tax credit increased progressively from \({\pounds }\)19.85 in 1999/2000 to \({\pounds }\)26.50 by 2002/2003.
The program allowed single parents to meet a personal advisor every 2 weeks and receive advice on job vacancies, in-work benefits, childcare arrangement, training, and job-search techniques.
Because of possible interaction with other policies, some caution is needed when comparing single mothers and single women without children: both groups were eligible for different types of support when not working, which could influence whether they would be unemployed or inactive. Single mothers could claim Income Support when not working, while single women without children had to claim Jobseekers’ Allowance, which has more stringent conditionality attached. Thus the composition of the inactive group among single women without children is likely to be very different to the single mothers.
Note that under the assumption of differential trends, this effect is smaller, as we need to net out the pre-existing trend, yielding a (significant) coefficient of 0.022.
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Acknowledgments
I would like to thank the referees of this journal, Manuel Arellano, Richard Blundell, Mike Brewer, Vicente Cuñat, Alan Manning, and Steve Pischke for insightful comments and suggestions. Financial support from the Spanish Commission of Science and Technology [ECO2011-30323-C03-02] and the ESRC, given through the Centre for Economic Performance, is gratefully acknowledged.
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Azmat, G. Evaluating the effectiveness of in-work tax credits. Empir Econ 46, 397–425 (2014). https://doi.org/10.1007/s00181-012-0678-x
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DOI: https://doi.org/10.1007/s00181-012-0678-x