Have Work Incentive Programs in US Been Effective in Promoting Employment Among Low Income Families Term Paper

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Incentive Programs Among Low Income

The effects of work incentive programs in encouraging low income individuals to participate in employment depend on the income thresholds of reforms in whether the individual gains benefits that are equal to or greater than what they would receive by not working. The factors in the determination include after tax income plus benefits, such as Earned Income Tax Credit (EITC) and fixed work costs, compared to the total change in revenue received. If the loss of welfare is greater than the total change in revenue, work incentives have no value and discourage employment participation. On the other hand, if the total amount of changed revenue is greater than the welfare loss and compensates for fixed work costs, incentives encourage employment among the low income.

The Tax Reform Act of 1986 (TRA86) expanded EITC benefits by increases in the standard deduction, personal deductions, and favorable tax rates. Overall, it implied substantial improvements for labor supply with positive labor participation and a more favorable fixed work costs. Tax rate reductions invite labor participation where tax rate increases discourage labor participation. Evidence shows that once and individual enters the labor force, they are likely to remain (N. Elissa).

EITC was intended to promote increases in labor supply, but literature emphasizes that taxes influence the equilibrium price of labor (Rothstein). Welfare and tax-based transfers play a significant role in low income distribution. EITC implied a -.36% tax rate phase in where the marginal tax rate implied a +21% phase out (Elissa). Beyond this incentive EITC tends to reduce incentive for employment participation.

"Most means tested income distribution programs impose high effective tax rates on earned income, thereby discouraging potential recipients from working" (Rothstein). Increases in labor supply cause decreases in wages. Where EITC recipients compete in the same labor market as non-EITC workers, non-EITC workers also see wage decreases without receiving EITC benefits. EITC's capacity to redistribute income to the poor is limited by unintended transfers that limit its effectiveness.

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When the income received is compared to work costs of childcare, health benefits, and welfare gains, non-EITC workers are discouraged from labor participation.

Wages are misleading concerning worker compensation of childcare, health benefits, and flexible schedules. Low wages do not always compensate for these fixed expenses. There are two limitations in wages were skill levels spill over to other levels of distribution and EITC expansion with U.S. welfare reform indicated a larger demand for elasticity. Some workers with the same skill levels may fall into two different income distribution levels. Low income distribution levels may not receive benefits, reducing the welfare gains. Especially women, who need to take off work a day to care for children do not always get compensated for loss of work hours.

Most programs focus on unemployed rather advancing low income workers (Riccio). Programs are expensive to implement and the labor market pay off compared to increased training is not always clear. Welfare to work programs often place workers in minimum wage positions, often with no benefits, where workers remain poor. Advancement strategy programs have had mixed results in advancing poor workers and contain inconsistent results. Training in incentive programs did not show increases in earnings or gaining new skills, where some participants did not complete the training programs. Those who did, did not show increased earnings. Although, public/private ventures where schools provided industry specific skills training geared toward local business needs increased earnings over a two-year period.

The Work Incentive Planning and Assistance Program (WIPA) was implemented by the Social Security Administration to serve beneficiaries of disability benefits and SSI to enable willing and able participants to return to work (Schimmel). Between Oct 2009 and Mar 2010, only 14% of the eligible participants enrolled in the program. Some of the eligible participants were afraid of….....

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