The next Economics Seminar of Paris-Saclay will take place on Thursday, January 20 from 12h15 to 13h15. The seminar will take place at Université d’Evry, in room Malinvaud (bâtiment Ile de France). Arthur Poirier (Université Paris 8) will present “The impact of EITC on education, labor market trajectories and inequalities” (joint with Julien Albertini and Anthony Terriau).
As a complement to the federal EITC, some states offer their own EITC, typically calculated as a percentage of the federal EITC. In this paper, we analyze the effect of state EITC on education using policy discontinuities at U.S. state borders. Our estimates reveal that an increase in state EITC leads to a statistically significant drop in high school completion. We then use a life-cycle matching model with directed search and endogenous educational choices, search intensities, hirings, hours worked, and separations to investigate the effects of EITC on the labor market in the long run and along the transitional dynamics. We show that a tax credit targeted at low-wage (and low-skilled) workers reduces the relative return to schooling, thereby generating a powerful disincentive to pursue long-term studies. In the long run, this results in an increase in the proportion of low-skilled workers in the economy, which may have important implications in terms of employment, productivity, and income inequalities.