Short-term effects of the expanded Child Tax Credit on U.S. labor force participation amid the COVID-19 pandemic
There is a common politicized thread to arguments against expanding the federal antipoverty Child Tax Credit program permanently and to the justifications that a majority of the U.S. Supreme Court used recently when they struck down affirmative action at higher education institutions for historically marginalized student applicants. This overarching theoretical argument is that policies that foster more economic equality and eliminate unfair advantages are themselves unequal and unfair.
This overarching argument is wrong, based on the best available evidence. In this era of politicized theoretical arguments, the importance of evidence-based research that informs policy decisions is paramount. In the case of affirmative action, research conducted over the past decade shows that eliminating these considerations at colleges and universities results in decreased percentages of a diverse array of students, resulting in continuing unequal access to a college education.
In the case of expanding the Child Tax Credit, recent evidence gathered amid the COVID-19 pandemic demonstrates this form of income support for lower-income families with children enables these families to better make ends meet without encouraging recipients of the credit to take the benefit and subsequently exit the workforce or reduce their participation in the U.S. labor market. This column presents the evidence about the efficacy of the expanded CTC benefits detailed in a new working paper, “The Short Term Labor Supply Response to the Expanded Child Tax Credit,” by economists Brandon Enriquez at the Massachusetts Institute of Technology, Damon Jones at the University of Chicago, and Ernest V. Tedeschi at financial research firm Evercore ISI (and now chief economist on the White House Council of Economic Advisers).
Their working paper details the consistency in labor force participation before and after the Child Tax Credit was expanded in 2021 to test the hypothesis that CTC recipients decrease their labor supply after receiving the credit. The expanded Child Tax Credit, enacted as a part of the American Rescue Plan Act, provided eligible families with additional income per child. Specifically, an extension of the plan in 2021 temporarily increased the child tax credit from up to $2,000 per qualifying child ages 16 and under to $3,600 for children ages 6 and under and $3,000 for children ages 6 to 17.
The expanded Child Tax Credit also was temporarily redesigned to include full-refundability of the credit, which meant that families with little to no income could receive it. This generated two main changes: the phase-in portion of the credit was removed, and an immediate income effect was created.
The prevailing theoretical expectation presumed that the income effect would cause CTC recipients to decrease their propensity to work, and increase their demand for leisure. Yet research shows that there is no evidence of a short-term change in labor supply for families who received the increased credit.
Specifically, using Current Population Survey microdata, the three economists examined labor supply outcomes among households who qualified for varying relative increases in household income via the expanded CTC income. They find that lower-income individuals used the expanded Child Tax Credit to strengthen their incomes while continuing to participate in the labor force, thereby strengthening the U.S. economy.
Enriquez, Jones, and Tedeschi also find that there was no change in “the relationship between labor force participation and CTC eligibility, which is nearly identical pre- and post-CTC expiration, suggesting the extended CTC did not reduce labor force participation.” This finding matches other recent research findings conducted on the 2021 expansion of the CTC on labor supply that also failed to produce significant results on an impact on labor supply.
Previous studies also showed that lower-income families were more likely to spend money on necessities: food, clothing, rent, and car payments, among other necessities. In addition, more saving occurs in higher-income Black and Hispanic families than in lower-income Black and Hispanic households.
The upshot: evidence demonstrates that labor force participation rates do not change for CTC recipients based on the size and the delivery of those benefits. In the future, then, the ability of the Child Tax Credit to help lower-income families should be a key economic policy objective for these families in order to foster more equitable, and thus stronger U.S. economic growth. The evidence is clear.