Optimal EITC in the Presence of Cultural Barriers for Labor Market Participation
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Optimal EITC in the Presence of Cultural Barriers for Labor Market Participation Michel Strawczynski 1 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract In this paper I simulate the entrance to the labor market in the presence of cultural barriers that constraint labor market participation of low-income workers. In this case, an optimal EITC depends on social planner’s relative preferences for persistently unemployed and working poor. I check EITC optimality in the short run under different types of social planners - from mild inequality averse to Rawlsian; and different kinds of policy makers – conservative, who favors the Working Poor, and liberal, who tolerates cultural barriers and favors the unemployed. Using simulations, I find that the imposition of an EITC is optimal in all cases, except for a Rawlsian and liberal policy-maker under the unusual case of full compliance to minimum wage. By calibrating the model for Israel, a country with well-documented cultural barriers for labor market participation, I find that the proposed framework will remain relevant in the foreseeable future. In light of these results and of EITC documented advantages, its scare use in developed economies remains an open question that merits further research. Keywords EITC . Cultural barriers . Social planner JEL Classification Numbers H24 . H31 . H53
Introduction The Earned Income Tax Credit (EITC) is a subsidy provided by the government to lowwage workers. It was implemented in the US in 1976, and it has been adopted gradually in additional countries. Nowadays the EITC is considered as one of the recommended tools for coping with poverty, together with others like child allowances, income maintenance for persistently unemployed and minimum wage. Many papers analyze
* Michel Strawczynski [email protected]
1
Department of Economics and Research Department, Hebrew University of Jerusalem and Bank of Israel, Jerusalem, Israel
Journal of Labor Research
the optimality of the EITC, which is dependent on extensive and intensive margins elasticities, available budget for re-distribution, labor aversion by individuals and social planner inequality aversion. However, the literature is silent about a crucial characteristic related to low income individuals’ participation: cultural barriers. These barriers, together with the low opportunity cost of staying persistently unemployed because of a low hourly market wage that is paralel to an income maintenance transfer, bring about an equilibrium in which the persistently unemployed avoids labor participation– posing a dilemma for policy makers: is it optimal in the short run to give a transfer to workers that are persistently unemployed or to use the resources for implementing an EITC? In this paper I build a model with an endogenous participation decision, which is characterized by cultural barriers. Using this model, I run simulations for different types of policy-makers and different behavioral parameters which are empirically plausible. I als
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