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EITC_6 - EITC Budget Constraint Earned Income Tax Credit...

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1 Earned Income Tax Credit Predictions and Evidence Ch6 pp.201-203 EITC Budget Constraint 7,500 10,047 13,750 16,297 29,666 Yearly Income ($) Unmarried, One Child, 2003 24 leisure (hours/day) W N = 1.34W W N = W W N = 0.84W $2,547 $2,547 Zone 1 For a worker in zone 1, the EITC is a typical wage increase. The substitution effect causes the worker to work more and the income effect causes the worker to work less. If the substitution effect is greater, the worker will work more (as shown below) with the implementation of the EITC. 7,500 10,047 24 leisure (hours/day) SE > IE H 1 H 2 Leisure Labor Yearly Consumption ($) W N = 1.34W Any worker whose reservation wage is between W and W N will enter the labor market as a result of the EITC program. Zone 2 For a worker in zone 2, the EITC is strictly an income increase. There is no substitution effect. The income effect causes the worker to work less. 7,500 10,047 24 leisure (hours/day) H 1 H 2 Leisure Labor 13,750 16,297 Yearly Consumption ($) IE only Zone 3 For a worker in zone 3, income has increased, but the net wage has decreased.
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