published in: Journal of Human Resources, 2007, 42 (1), 1-31
In October 1999, the British government enacted the Working Families’ Tax Credit, a
generous tax credit aimed at encouraging work among low-income families with children.
This paper uses longitudinal data collected between 1991 and 2001 to evaluate the effect of
this reform on single mothers. We identify this impact by comparing changes in behavior of
lone mothers to changes for single women without children. Our results show that the
financial incentives of the reform had powerful effects on a wide range of lone mothers’
decisions. The reform led to a substantial increase in employment rates of about 7
percentage points, which was driven by both higher rates at which lone mothers remained in
the labor force and higher rates at which they entered it. Women’s responses were highly
heterogeneous, with larger effects for mothers with one pre-school aged child, and virtually
no effect for mothers with multiple older children. The reform also led to significant reductions
in single mothers’ subsequent fertility and in the rate at which they married. Our findings
suggest that the generous childcare tax credit component of the reform played a key role in
explaining the estimated employment responses. Finally, we find relatively large behavioral
effects in anticipation of the actual reform, which emphasizes the importance of allowing for
such effects in future evaluation research.
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