Labour Supply Response to the Working Income Tax Benefit (WITB): A Difference-in-differences Approach

The Working Income Tax Benefit (WITB) is a federal level refundable tax credit program in Canada. This paper is the first study that measures the actual labour supply response to this program. Using confidential microdata from the Labour Force Survey (LFS) and exploiting the quasi-experimental nature of the WITB, I construct a treatment group and a control group based on the eligibility for the program. Then I employ the difference-in-differences technique to estimate the average effect of the WITB on the employment and hours of work of the eligible individuals. I also incorporate an instrumental variable strategy with the difference-in-differences framework to encounter a potential endogeneity problem. I find that the WITB increased the probability of being employed by up to around two percentage points, and hours of work per week by up to around forty minutes.