This is one in a series of 15 two-page, evidence-based framing memos on pressing education and social issues prepared by MDRC for the incoming Obama Administration and the new Congress.

Bottom Line

Poverty rates in the United States have remained stubbornly persistent for the past 35 years; an important cause has been stagnant and at times declining real average earnings among low-wage workers, particularly men. A related increase in single-parent families is another key factor.

A strong body of evidence demonstrates that work-based earnings supplements — such as the federal Earned Income Tax Credit (EITC) — boost employment and earnings and reduce poverty, while increasing work.

What Do We Know?

The Earned Income Tax Credit: The federal EITC is the largest antipoverty program for working families by far; more than 20 million taxpayers take advantage of the EITC each year, at a cost exceeding $40 billion. The EITC’s distinguishing feature is its status as a safety net built around work — only people with earnings can claim the credit. Non-experimental research evidence suggests that:

• The EITC increases work, increases income, and (when counted as income) reduces family poverty by a tenth, reduces poverty among children by a fourth, and closes the poverty gap by a fifth.

• The mostly single mothers who received earnings supplements in these studies were more likely to work, earned more, had more income, and were less likely to be in poverty.
  
  
• The earnings supplements also had a secondary benefit for children. Young school-age children of participating parents did better academically than like children in the control group.

Rent Incentives for Public Housing Residents: A recent demonstration program that incentivized work by offering to hold rents in public house developments steady when residents took jobs (and offered them a range of job-seeking services) had large positive earnings effects for many different types of residents, including striking earnings effects for immigrant men and positive but smaller impacts on residents’ employment rates.

Key Choices

To make more significant inroads in reducing poverty, increase the existing EITC but for whom — married couples, large families, noncustodial parents, or singles and second-earners? The current federal EITC provides large benefits to families with children, mostly single mothers, and minimal benefits to singles, even though declining wages have affected all low-income workers. These disparities create disincentives to work in the formal labor market and for poor men and women to marry, cohabitate, and coparent. Strategies that expand the current EITC would reduce family and child poverty but could perpetuate existing inequities. Increasing the benefit only for noncustodial parents would help, but it would create perverse incentives to father children out of wedlock. Strategies that substantially increase the singles benefit, while also eliminating marriage penalties, could both redress current inequities while increasing earnings and income in two-parent households. This could be accomplished by basing eligibility on individual income rather than joint income; second-earners in two-parent households would also benefit and family poverty would decline substantially, even more if this change led to increases in coparenting or marriage.

While think tanks, academics, and elected officials from the right and the left have proposed expanding the EITC for singles, these proposals raise a number of questions about feasibility and about impacts on work, poverty, marriage rates, and criminal activity. Budget constraints might require proceeding in stages — for instance, increasing the existing single credit modestly as Congressman Rangel has proposed and reducing marriage penalties somewhat, while supporting a large-scale test of a more generous program with no marriage penalties.

Go beyond the EITC to test other financial incentives across different settings and with different populations. One of the most consistent findings across studies is that earnings supplements work in a variety of settings with different populations. New studies, like Mayor Bloomberg’s Opportunity NYC and the Performance-Based Scholarship Demonstration, are testing whether other kinds of financial incentives can encourage achievement in school and college, promote healthy behaviors, and encourage work and training activities.

Key References

Berlin, Gordon. 2007. "Rewarding the Work of Individuals: A Counterintuitive Approach to Reducing Poverty and Strengthening Families." The Future of Children, 17(2), 17-42.

Bloom, Howard, James Riccio, and Nandita Verma. 2005. Promoting Work in Public Housing: The Effectiveness of Jobs-Plus. New York: MDRC.

Holt, Steve. 2006. The Earned Income Tax Credit At Age 30: What We Know. Washington, DC: Brookings Institution.

Michalopoulos, Charles. 2005. Does Making Work Pay Still Pay? An Update on the Effects of Four Earnings Supplement Programs on Employment, Earnings, and Income. New York: MDRC.