Research

We study the spillovers of a working tax credit directed towards low-income workers and administered through firms. We uncover heterogeneous effects of the tax credit on workers as a function of their firms’ differential exposure to the reform arising from variation across firms in the fraction of eligible workers before the reform. Eligible workers in high-exposure firms see their pre-tax wage earnings decrease relative to eligible workers in low-exposure firms. Ineligible workers in more exposed firms also see their wage earnings fall indicating spillover effects. The evidence presented is consistent with a monopsonistic labor market model with equity constraints in gross wage earnings or with
substitution between eligible and ineligible workers. Preliminary findings on employment suggest workers’ substitution is the key mechanism.