A recent study challenges traditional economic assumptions by demonstrating that cash benefits can encourage low-income workers to remain employed. Co-authored by Dionne Pohler, a professor at Cornell University, the research highlights the effects of Canada’s Working Income Tax Benefit (WITB), a program akin to the U.S. Earned Income Tax Credit (EITC). The findings suggest that modest tax refunds can significantly impact employment stability among low-income individuals.
The study indicates that single workers with young children and those receiving social assistance were the primary beneficiaries of the tax refunds. On average, recipients received approximately 700 Canadian dollars (about $500), which helped cover essential work-related expenses such as child care and transportation. This financial support allowed individuals to work more hours without jeopardizing their welfare benefits, a phenomenon that the researchers refer to as avoiding the “welfare wall.”
Key Findings on Employment and Cash Transfers
Pohler, alongside Kourtney Koebel from the University of Toronto, published their findings in the journal Industrial Relations: A Journal of Economy and Society on December 5, 2023. Their research challenges the prevailing belief that providing financial assistance discourages work. Instead, they found that unexpected cash transfers can motivate low-income workers to stay in the labor market.
The study revealed that many Canadians were unaware of the WITB and its benefits. Between 2007 and 2019, a significant portion of eligible individuals did not apply for the program, which led to the implementation of automatic enrollment reforms for the renamed Canada Workers Benefit. This lack of awareness provided a unique opportunity for analysis, allowing the researchers to compare employment outcomes between those who received the benefit and those who did not.
Pohler stated, “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.”
Implications for Policy and Future Research
The research findings indicate that WITB benefits had a “robust and substantial positive effect” on continued employment across various demographic groups. Recipients on social assistance increased their earnings while maintaining their benefits, while those not on social assistance may have experienced a more favorable work-life balance as a result of the cash support.
Pohler emphasized that although the amount received was modest, the impact on these workers was significant. “People will take that unexpected money and put it toward something that helps them maintain their employment or productivity,” she noted. The study found that WITB refunds could represent between 9% and 18% of earnings for individuals or couples receiving the maximum benefit.
Looking ahead, Pohler and Koebel advocate for further research to explore similar methodologies in assessing the EITC. They argue that the findings prompt a reconsideration of longstanding economic theories that suggest cash benefits deter work.
“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,” Pohler said. “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.”
With the backing of the Social Sciences and Humanities Council of Canada, this research provides valuable insights into the potential of government cash transfers to support low-income workers and reshape welfare systems.
