The Impact of Labor Income Reward Plan: An EITC Experiment in China

Labor Income Reward Palan: The scheme of the Labor Income Reward Plan is similar to EITC in the United States. Namely, for the first 400 RMB (80 USD) earning per capita, the reward will be a 50% of the earnings for households with less one child, and a 40% for those with two or more children. When the earning per capita is between 400 RMB to 600 RMB, the reward is 200 RMB per capita for households with less than one child and 160 RMB per capita for households with two or more children. Then, the reward will start to decline as the earnings increases. The rate of decline is 50% for households with less than one child and 40% for households with two or more children. At this rate, the reward will decline to zero once the earning reaches 1,000 RMB regardless of the number of children.

2014-12-01

2017-02-28

The two-year experiment on 259 households shows that the participation of the program increases employment by 0.33 person per household and monthly working hours by 81 hours per household.

We also find significant increases in household earnings and expenditures.

The experiment contains two stages. The first stage is the pilot, and the second stage is the actual experiment. The pilot is a small-scaled RCT experiment with only 65 households in the sample. The purpose is to figure out all the policy parameters that will fit the budget and anticipate potential problems during the execution. For the experiment, first, we received a list of households (around 200) the local government wants us to consider. Then we randomly assigned them into the treatment and the control group.

All households in the treatment group enrolled in the EITC program and will receive a cash reward every month. The amount of reward depends on household earnings during the last month.

Once a household is enrolled, the household will have to report the earning and employment status (of all members) every month in order to get the reward. Each claim needs supporting materials such as proof of employment and income. There are auditing and validation processes to verify the claims. Finally, we track other changes through household surveys.

Finally, we compared outcomes such as employment and hours worked between the two groups to identify the effectiveness of the EITC program.

By computer

Odd and even group

No

259 Households

259 Households

131 households treated, 128 households control

As more households in the People’s Republic of China (PRC) are lifted out of poverty, it becomes increasingly difficult to address the remaining poor by implementing traditional cash transfer programs due to inaccurate identification and the welfare dependency issue. One solution is to implement an incentive-compatible transfer program such as the Earned Income Tax Credit (EITC) in the United States. Starting in 2014, the China Household Finance Survey (CHFS) conducted a series of experiments. Evaluations present unambiguously strong evidence that EITC increases labor supply, earning, and expenditure in the PRC. Inspired by the early success, many Chinese local governments have been trying to come up with their own EITC-like programs or trials. This paper will discuss some of the ongoing experiments or trials in the PRC.

Gan, L., Guo, X., He, Q., & Wang, J. (2020). Earned income tax credit experiments in the People's Republic of China (No. 1144). ADBI Working Paper Series.

https://www.adb.org/publications/earned-income-tax-credit-experiments-prc