Published and Forthcoming
Accepted for publication at Economic Development Quarterly
One of the most important aspects of entrepreneurship is its role in job creation and employment growth. The transition from a non-employer to an employer is a significant decision for the entrepreneur, as hiring the first employee is often harder than hiring subsequent employees given the associated fixed costs. The Earned Income Tax Credit (EITC), a benet for working low-income individuals, may be one policy that may impact the job creation aspects of entrepreneurship. While the main beneficiary is the recipient of the credit, employers are able to capture some of the surplus by paying lower wages. The wage savings from the EITC may influence the decision to open, expand, contract, and shutdown. Using a contiguous cross-border county analysis, I find that the difference in the number of establishment births (hiring of the first employee), and expansions significantly decreases between counties with a state EITC policy and their cross-border counterpart without such a policy, upon implementation of the tax credit. These results hold both for differences in the existence and differences in the generosity of the policy. These effects are particularly strong in rural counties where labor markets are relatively thinner in comparison to more populous counties. These results suggest a trade-off between the increased labor supply effects of the EITC and decreased labor demand, a feature which should be considered when a state is deciding to implement or expand their own Earned Income Tax Credit.
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