The EITC, Tax Refunds, and Unemployment Spells

The Earned Income Tax Credit generates large average tax refunds for low-income parents, and these refunds are distributed in a narrow time frame. I rely on this plausibly exogenous source of variation in liquidity to investigate the effect of cash-on-hand on unemployment duration. Among EITC-eligible women, unemployment spells beginning just after tax refund receipt last longer than unemployment spells beginning at other times of year. There is no evidence that tax refund receipt is associated with longer unemployment duration for men, or that the longer durations for women are associated with higher-quality subsequent job matches. The Earned Income Tax Credit (EITC) has grown to be an important part of the safety net for low-income families. In 2003, EITC-recipient households received payments averaging $150 per family per month, while the average TANF-recipient household received $140 in monthly welfare benefits and the average food stamp participant got benefits of $80 per month (Congressional Budget Office 2005). Although most transfer programs deliver benefits in periodic payments spread over time, EITC payments typically arrive in one annual lump sum. Beverly, Schneider, and Tufano (2006) point out that for many EITC recipients, their federal tax refund will be the single largest payment received during the year. As a result, EITC recipients tend to have temporarily high levels of liquid assets just after tax refunds are distributed. Building on recent evidence showing that higher levels of liquid assets are associated with longer unemployment spells, this paper uses refund-related variation to investigate the sensitivity of unemployment duration to cash-on-hand among low-income parents. The distinctive pattern of EITC-related tax refunds received by low-income parents provides the foundation for my empirical strategy. Low income families with children receive tax refunds that are large relative to their annual income. Averaged over 1993 to 2007, filers with children and with income in the EITC range received refunds equal to 30% of their annual adjusted gross income. Payment of tax refunds is more temporally concentrated for low-income filers than for the population as a whole. In recent years more than half of EITC payments have ∗Department of Economics, Williams College. I thank Jane Dokko, Jessica Goldberg, Laura Kawano, Melinda Miller, Lucie Schmidt, Lara Shore-Sheppard, Nick Wilson, and seminar participants at UC-Berkeley, UC-Davis, Office of Tax Analysis, and the Institute for Research on Poverty for helpful comments. I am grateful for financial support from the W.E. Upjohn Institute for Employment Research. All errors are my own.