Would a Child Allowance Affect Workforce Participation?

February 12, 2021 Topic: Labor Region: The Americas Blog Brand: The Reboot Tags: Mitt RomneyWorking MothersChildcareSubsidiesEmployment

Would a Child Allowance Affect Workforce Participation?

Senator Romney’s proposal would introduce conflicting incentives, making it difficult to anticipate fully its employment effects.

Alongside Senator Mitt Romney’s (R-UT) recent child allowance proposal, congressional Democrats have now released their own plan. The Democrat’s proposed child benefit is slightly smaller than what Senator Romney proposed, but it leaves intact child benefits in other programs that Romney’s proposal would eliminate to help pay for the new benefit. Proponents have championed the advantages of a child allowance, including reduced child poverty and potential pro-natal effects. Meanwhile, critics have raised concerns — namely, that the policy would reduce employment and jeopardize the best long-term path out of poverty for vulnerable families.

The potential employment effects of a child allowance generate a lot of debate. The research concludes that government benefits reduce employment because programs generally pay higher benefits to those with a lower income (see Yonatan Ben-Shalom and his co-authors’ summary here and Robert Moffitt’s update). Critics of benefit programs (such as myself) believe these employment effects are meaningful and advocate for attaching work requirements to government benefits or incentivizing employment through programs such as the Earned Income Tax Credit (EITC).

A child allowance would pay a flat benefit for all families (that is, it would not phase in) and phases out only at very high levels of income. But the evidence base still largely concludes that employment would decline because of such a policy. The authors (a reputable but politically left-leaning group) of a National Academies of Science’s (NAS) report on reducing child poverty in the US assessed the behavioral implications of a child allowance in 2019, writing:

“In its simplest form, a universal child allowance with no phase-out simply provides additional income to each family with children in receipt of a benefit. In the conventional static model of labor supply in economics, this corresponds to an income effect. Economic theory predicts that increases in income that do not increase or decrease the marginal return to an extra dollar of earnings will reduce the incentive to work, and empirical work in economics strongly supports this prediction, although the magnitude of the reduction differs across studies.”

The authors then estimated the employment and earnings effects of a child allowance (among other policies) similar to what the Democrats are proposing. They concluded that more than one third of unmarried women would reduce their employment by at least one hour per week and the policy would result in an aggregate loss in employment hours of 277.4 million (see page 546).

Senator Romney’s proposal would introduce conflicting incentives, making it difficult to anticipate fully its employment effects. On the one hand, eliminating TANF could increase the financial rewards of extra work for families. However, the proposal also offers a substantial cash benefit to families regardless of their earnings, which could discourage work among families with little to no income. Also, Romney’s plan provides a much smaller EITC to families than is currently offered and slows how quickly it phases in, decreasing some of the existing work incentives associated with the EITC.  Overall, a net decline in employment would likely result.

To be fair, the authors of the NAS report found that employment reductions would not substantially reduce the total number of children a child allowance would lift out of poverty. But the authors did not present their results for different subgroups. It is possible that those at the very bottom (who would remain poor even with a child allowance) would become even poorer without employment.

The results also tells us nothing about the long-term prospects for poor families. It can be deceptive to focus solely on the number of people a proposal “lifts out of poverty” at a point in time, as my colleague Scott Winship points out. A child allowance would reduce poverty by raising families’ income just above the poverty level, but families also need a chance at mobility. For a vast majority of low-income families, employment is the only viable path to the middle class.  

This research alone should give supporters of a child allowance some pause. It is understandable for supporters to argue that the large poverty reductions (and other positive benefits) outweigh the costs. But what if we had a policy that reduced poverty without reducing employment?

The NAS report offers some guidance here too. The authors modeled an EITC expansion and found that increasing this credit by 40 percent would increase the employment rate by 7.4 percentage points and result in 771,000 new jobs (page 490), while also reducing poverty. The overall child poverty reduction would be smaller than a child allowance, but this approach could reduce poverty and open pathways for vulnerable families to reach the middle class.

Ignoring the likely declines in employment due to a child allowance shortchanges the debate and raises the possibility that some families will be left worse off. Policymakers and analysts should consider carefully the full implications of a child allowance, and they should explore alternatives that might achieve its core goals without reducing employment.

This article was first published by the American Enterprise Institute.

Image: Reuters