Labor Supply at the Extensive and Intensive Margins: The EITC, Welfare, and Hours Worked

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Abstract
It is commonly asserted that labor supply responses at the extensive margin (participation) are much greater than at the intensive margin (hours). Nevertheless, this pattern has not been extensively documented. Furthermore, current models of labor supply used in estimation and simulation do not incorporate this response difference. This paper examines these issues in the context of recent changes in the Earned Income Tax Credit (EITC) and welfare reform. The EITC unequivocally encourages single parents to work at least some hours during a year because it shifts out the budget set at all positive hours points. This prediction has been extensively confirmed in the data. Theory also implies that the EITC will decrease hours worked among those already working. For the vast majority of recipients on the plateau or phase-out portions of the credit, the EITC reduces or does not change the after-tax wage while at the same time discouraging work through the income effect of the credit payment. However, recent hours worked patterns for EITC eligible individuals do not appear to fit this second prediction. Hours worked per week and weeks worked during the year among likely recipient groups have not fallen. This paper documents these facts and argues that alternative models of labor supply that recognize differential participation and hours responses should be used in both estimation and policy simulations.