Working for Families as employer subsidy - again

Susan St John takes issue with what I'd written on Working for Families.

I'd tried posting a reply to her over at the Daily Blog, but my comment disappeared into the ether immediately, and when I tried logging in with Twitter, it told me I wasn't allowed. Maybe they don't like me there.

I'll hit it here instead, but wish I didn't have to type it again. And here's my original blog post.

Prof St John's primary argument is that subsidy incidence does not apply because of the lump-sum nature of Working for Families. It isn't a wage subsidy on top of earnings. Rather, the In Work Tax Credit provides you with $72 per week so long as you're working at least 20 hours per week, then abates if your family income gets high enough.

But I think about WFF around the extensive margin, with the in-work tax credit helping to front the fixed costs of being in work in the first place. Reservation wages can wind up being high if you have to deal with the hassle of sorting out being a working parent, but once that's fronted, things can be different.

Consider a worker with a high reservation wage, because of those fixed costs, and where the reservation wage is then higher than any employer's willingness to pay. For some people, the IWTC would be at least sufficient to flip things at that extensive margin by covering those fixed costs. You then get, from the employer's perspective, a normal looking labour supply curve from that worker that begins at the 20-hour mark, and unwillingness to supply less than that amount of labour. I don't see why you wouldn't get some division of the IWTC between employer and employee. But it hardly seems the most important thing going on with IWTC.

As I understood things in the mid-2000s, the point of WFF with the IWTC was to encourage people off of benefits and into work. Employment among single parents has increased - although at a cost to hours worked by married women and (to a lesser extent) by married men because of the higher EMTRs in the clawback ranges. Abolishing the work requirements for the IWTC, as St John recommends, turns the programme into a family-income-linked child benefit that doesn't do the same job in encouraging labour force participation. I suppose folks can argue the merits of that; I prefer the work linkage.

I still expect it would make more sense to boost the incomes of working families with dependents by increasing the in-work tax credit than by increasing minimum wages.

And I'm a bit perplexed by Prof St John's suggestion that I want to turn WFF into EITC (America's wage subsidy), and her consequent demand that I defend EITC. The in-work tax credit is broadly similar to EITC, except without a phase-in period.* I'd have to look a lot more closely at both to make any suggestions about changing WFF here to be EITC. 



* And FFS don't make a big list of all the other differences and damn me for not listing them all.