Recent research challenges the traditional economic view that low-income individuals would cease working if given financial assistance. A study co-authored by Dionne Pohler, a professor at Cornell University, found that a modest tax benefit in Canada, akin to the U.S. Earned Income Tax Credit (EITC), actually encouraged low-income workers to remain employed. The findings, published on December 5, 2023, in the journal Industrial Relations: A Journal of Economy and Society, highlight the positive impact of the Working Income Tax Benefit (WITB) on employment rates among low-income Canadians.
The study revealed that single workers with young children and those receiving social assistance were the primary beneficiaries of the WITB, which averages around 700 Canadian dollars ($500). These tax refunds helped cover essential working costs, such as childcare and transportation, enabling recipients to work more hours without losing welfare benefits. This insight adds a new dimension to ongoing policy discussions regarding government transfers to low-income workers and the potential for guaranteed basic income programs.
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.” The research, co-authored by Kourtney Koebel from the University of Toronto, emphasizes that such financial support can serve as a significant motivator for continued employment.
Despite the clear benefits, the study highlighted a concerning gap in awareness regarding the WITB. Many eligible Canadians lacked knowledge about the program, leading to a significant portion not applying for the benefit between 2007 and 2019. Although reforms later made the receipt of the renamed Canada Workers Benefit automatic, the research utilized this lack of awareness to assess the effects of unexpected cash transfers on employment.
Using this unique situation, the researchers compared individuals who received the WITB to those who did not. They discovered that recipients on social assistance not only earned more overall but also worked additional hours while skillfully navigating the “welfare wall,” a disincentive that often discourages individuals from increasing their work hours for fear of losing benefits. For those not on social assistance, the financial support likely contributed to a better balance between work and personal life, leading to less overall income but potentially more stability.
“The effect isn’t massive, but this is a small amount of money, and the impact on this group of workers is significant,” Pohler explained. “People will take that unexpected money and put it toward something that helps them maintain their employment or productivity.”
The study noted that WITB refunds could represent between 9% to 18% of earnings for individuals or couples receiving the maximum benefit. Pohler and Koebel advocate for future research to apply similar methodologies to the EITC, arguing that their findings raise essential questions regarding the assumption that financial assistance leads to reduced workforce participation.
They assert that policymakers should start with the belief that most people want to contribute positively to society. This perspective might open avenues for more effective and affordable work incentives, moving away from complex welfare systems that often carry stigma. “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 remarked. “Then the question becomes, how much? We show that a very small amount of money can make a big difference.”
The research was supported by the Social Sciences and Humanities Council of Canada, underscoring its importance in shaping future discussions on economic policies aimed at supporting low-income workers in Canada and potentially beyond.
