The Impact of the EITC on the Labor Supply in Korea

We attempt to investigate the impacts of the EITC on the labor supply of low-income workers in Korea, using a general equilibrium multi-income-class overlapping generations model, which reflects the income risks and the credit constraints faced by the low-income households, and endogenizes the labor supply decision-making on labor participation and labor hour, which makes it possible to study workers’ moral hazard. It is found that the current EITC has only limited impacts on the labor supply of lowincome-class workers. Even though the current system raises their employment rate of lower income classes, the magnitude of increase is small, because of pre-existing MLSS, which provides generous benefits, and inefficiency of UI and MLSS administration, which restrict the effectiveness of EITC. Moreover, the current EITC tends to decrease labor hour of most of middle- and low-income-class workers. It is also found that the EITC revision, which raises the phase-in rate and maximum credit level, substantially improves the work incentives to the low-income-workers, with little deterioration of labor supply of high-income worker, and that the improving effects are amplified with the reduction of MLSS benefits and improvement of administration of social welfare policies.