The Interaction of Metropolitan Cost-of-Living & the Federal Earned Income Tax Credit: One Size Fits All?

This paper explores the interaction between the federal Earned Income Tax Credit (EITC) and the cost-of-living faced by single mothers. After the 1993 EITC expansion, we identify up to a 10 percentage point increase in labor force participation for single mothers in the lowest cost areas but no discernable response in the highest cost areas. We conclude that the EITC’s welfare-enhancing properties are undermined by the interaction of the program’s fixed national rules and geographic variation in wages and cost-of-living. In addition, our findings suggest that the EITC does little to reduce joblessness in many of the nation’s largest cities. We would like to thank Stacy Dickert-Conlin, Andrew Hanson, Jeffrey Kubik, Tim Smeeding, Tracy Gordon, Gary Engelhardt, Chris Rohlfs, and Perry Singleton for helpful comments and guidance. We would also like to thank Yong Chen and Stuart Rosenthal for use of their quality-adjusted rental cost data. The views expressed in this paper are solely those of the authors and should not be construed in whole or in part to any branch of the federal government. Any remaining errors are our own.