https://macropaperwarehouse.com/authors/arthur-poirier/Arthur PoirierHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/the-impact-of-eitc-on-education-labour-market-trajectories-and-inequalities/https://macropaperwarehouse.com/papers/the-impact-of-eitc-on-education-labour-market-trajectories-and-inequalities/<p>This paper studies the effect of the Earned Income Tax Credit (EITC) on educational attainment and labor market trajectories through two complementary approaches. Using policy discontinuities at U.S. state borders—exploiting variation in state EITC generosity set as a percentage of the federal EITC—the paper finds that an increase in the state EITC leads to a statistically significant increase in the high school dropout rate. The mechanism is that a tax credit targeted at low-wage (low-skilled) workers increases the value of low-skilled employment and reduces the relative return to schooling, generating a powerful disincentive to pursue long-term studies. A structural life-cycle matching model with directed search and endogenous educational choices, search intensities, hirings, hours worked, and separations is developed to quantify the long-run general equilibrium effects: in the long run, EITC reduces the proportion of high-skilled workers, with ambiguous effects on income inequality that depend on the competing channels through which EITC affects both the supply and demand sides of the labor market.</p>