Classic economic theory assumes low-income people would stop working if governments gave them money as a strategy to reduce poverty.
New research co-authored by a Cornell expert in industrial relations challenges that assumption, finding that a modest tax benefit in Canada - similar to the U.S. Earned Income Tax Credit (EITC) - encouraged low-income workers to stay employed.
Single workers with young children and those receiving social assistance benefited most, suggesting the tax refunds - about 700 Canadian dollars ($500) on average - either helped them to cover the fixed costs of working, such as child care and transportation, or allowed them to work more without losing welfare benefits.
The findings are relevant to broader policy debates about government transfers to low-income workers and guaranteed basic income, the researchers said, and suggest opportunities to simplify complex and stigmatizing welfare systems.
"Low-income workers are more likely to stay employed if they receive an unanticipated cash transfer, rather than leave the labor market, as most people worry they will and theory predicts," said Dionne Pohler, the David and Alexandra Lipsky Professor in Dispute Resolution and Labor Relations in the ILR School.
Pohler is the co-author with Kourtney Koebel, assistant professor at the University of Toronto's Centre for Industrial Relations and Human Resources, of "The Impact of Canada's Working Income Tax Benefit on the Labor Supply of Low-Income Workers," published Dec. 5 in Industrial Relations: A Journal of Economy and Society.
Canada's Working Income Tax Benefit (WITB) and the EITC both aim to incentivize work by providing low-income workers earnings subsidies up to certain thresholds. But they can't act as incentives if people don't know about or understand them - a reality acknowledged by a growing body of research.
Pohler and Koebel found Canadians knew little about the WITB or how it was structured, such that a significant percentage of eligible recipients did not even apply for it between 2007 and 2019. (Reforms later made receipt of the renamed Canada Workers Benefit automatic.)
That lack of knowledge created a research opportunity: Instead of incentives, the scholars said, the tax refunds could be viewed as unanticipated government benefits - essentially "free money" that recipients could use as they saw fit. And since not all those eligible sought the benefit, the scholars could compare those who received money to those who did not. Economists typically can't study such conditions easily, in the past relying on field experiments and studies of lottery winners.
"We exploit this evidence of low knowledge to ask, among people who get the money, what happens subsequently?" Koebel said.
Across different demographic subgroups, WITB benefits imparted a "robust and substantial positive effect" on continued employment, the scholars wrote. Recipients on social assistance earned more money overall, suggesting they worked more while avoiding the "welfare wall" that would strip them of benefits - a strong current disincentive to working. Recipients not on social assistance earned correspondingly less, possibly because the help meeting fixed costs enabled them to achieve a better work-life balance.
"The effect isn't massive, but this is a small amount of money, and the impact on this group of workers is significant," Pohler said. "People will take that unexpected money and put it toward something that helps them maintain their employment or productivity."
WITB refunds could range from 9% to 18% of earnings for individuals or couples receiving the maximum benefit, according to the research.
Pohler and Koebel said future research should apply the same methodology to the EITC. They said the current findings, at minimum, raise questions about the traditional economic assumption that people will stop working if given money without strings attached. Policymakers starting with a different expectation - that most people want to contribute productively to society - may be open to opportunities to incentivize work more effectively and affordably than expensive systems focused on policing compliance and abuse.
"If you assume that low-income workers need help because they don't make much money, and just send them money, they're going to be able to do important things like maintain employment, or take care of their kids," Pohler said. "Then the question becomes, how much? We show that a very small amount of money can make a big difference."
The research received support from the Social Sciences and Humanities Council of Canada.
