Do wage subsidies increase labor force participation?

For decades, governments have searched for ways to encourage work and reduce poverty, especially among low-income families. One strategy has been the use of refundable wage subsidies, such as the Earned Income Tax Credit (EITC). Introduced in 1975 in the U.S. and expanded significantly in the 1990s, the EITC is credited with boosting employment, particularly among single mothers (e.g., Eissa and Liebman 1996; Meyer and Rosenbaum 2001; Bastian 2021; Hoynes and Patel 2022). Yet recent academic debate has questioned the size of those effects (e.g., Kleven 2024). This blog examines evidence from 30 countries with EITC-style policies—defined broadly as any measure that lifts the after-tax wage of low earners, whether delivered as a refundable credit to workers, an employer-side rebate, or a non-refundable offset—to assess how such wage subsidies affect labor supply across diverse institutional and cultural settings.

Across these programs, a clear pattern emerges: Refundable wage subsidies increase labor-force participation, especially among groups on the margins of employment—such as single parents and low-wage workers. This holds across countries as diverse as the United Kingdom, France, South Korea, Chile, and South Africa.

Evidence from anglophone countries offers some of the clearest support. The United Kingdom’s Working Families’ Tax Credit, launched in 1999, increased single-mother employment by 5 percentage points, with the largest gains among those with young children (Brewer et al. 2006; Francesconi & van der Klaauw 2007). Canada introduced the Working Income Tax Benefit in 2007 and replaced it with the more generous Canada Workers Benefit in 2019, which increased labor-force participation, including a 2-5 percentage point gain among single adults and single parents (Koebel & Pohler 2024; Tabbara et al. 2021). In New Zealand, the 2004 Working for Families package increased single-parent employment by 1.7 percentage points within five years, while also reducing poverty from 9.2% to 7.0% overall and from 21.6% to 12.3% among single-parent households (Mok & Mercante 2014; Plum, Pacheco, and Hick 2019).

Continental Europe provides further evidence that these programs work even in countries with more generous welfare states. France’s Revenu de Solidarité Active (RSA), introduced in 2009, raised employment by 2–3% among single parents (Anne & L’Horty 2012), and its 2016 successor, the Prime d’Activité, continues to encourage work in low-wage regions (Gravoueille 2025). Germany’s Hartz reforms, implemented in the early 2000s—within a broader package of policy reforms—subsidized “mini-jobs” (with monthly earnings under €556), increasing labor force participation and reducing unemployment (Carrillo-Tudela, Launov, Robin 2021; Tazhitdinova 2022). Belgium’s Workbonus, introduced in 2006, raises net wages for low‑hour earners and boosts labor supply (Orsini 2007; Dagsvik et al. 2011; Decoster and Vanleenhove 2012). In the Netherlands, the refundable EITC offers up to €5,500 and raised part-time employment by more than ten percentage points among single mothers (Bosch & van der Klaauw 2012; Mastrogiacomo et al. 2017). Italy’s refundable Bonus 80 euro, introduced in 2014, provides lower-income workers up to €960 per year; while the credit shaved average wages by 1–2% in highly exposed firms, it boosted employment enough to leave aggregate payroll essentially unchanged (Zurla 2024). Finally, Work Incentives of the Guaranteed Income (2017) in Navarre, Spain led beneficiaries to transition from relying solely on cash assistance to supporting themselves through paid employment (Cámara de Comptos de Navarra, 2024).

Even in Nordic countries, where employment rates are already high and welfare systems generous, in-work benefits show positive effects. Denmark’s beskæftigelsesfradrag, in place since 2004, was supplemented in 2011 with a top-up for single parents; studies found this program led to six additional work weeks per year and a 3-5% employment increase among single parents (Andersen 2019). Sweden’s EITC, adopted in 2007, raised overall employment by about 1.75 percentage points and delayed retirement among older, high-income men (Edmark et al. 2016; Laun 2017), providing evidence that age-targeted supplements can help extend workforce participation. Finland’s expansion of its municipal and central earned-income credits in 2008 increased employment by 0.6–0.8% (Kotamäki 2016).

In other parts of the world, the pattern still holds. In Chile, the Subsidio al Empleo Joven (2009) and Bono al Trabajo de la Mujer (2012) provided a 20% earnings subsidy up to a cap and raised formal employment by 2–3 percentage points for youth and low-income women (Martínez Peña 2022; Berniell & Mata 2021). Israel’s EITC, first piloted in 2007, reduced employment exit rates by roughly at least 1 percentage point for every 100-shekel increase in the monthly credit, with the biggest effects among ultra-Orthodox men and older women (Brender & Strawczynski 2020). South Africa’s Employment Tax Incentive is a non‑refundable credit for employers and led to youth‑employment gains of 0.9 percentage points in small firms (Bhorat et al., 2020).

Across Asia, similar trends emerge. South Korea introduced its EITC in 2008 and later expanded it to the self-employed. Across groups, the program raised labor-force participation by 1.6 to 10.6 percentage points, with the largest effects for low-income workers in the phase-in range (Park & Lee 2018; Song and Bang 2014). In China, local pilot programs introduced in 2014 also show positive labor supply effects (Gan 2020). Hong Kong’s Working Family Allowance began in 2016 and is a refundable cash transfer that phases in with earnings, paying up to HK $1,610 a month per household (plus HK $1,610 per child), though one analysis shows a null impact on labor supply. Singapore’s Workfare Income Supplement, introduced in 2007, is a partly refundable credit targeted more heavily at older workers, and it raised employment rates among low‑educated Singaporeans by 2.7 to 7.3 percentage points, with larger effects for older adults (Ministry of Trade and Industry, 2014)

Several countries operate EITC‑style schemes whose labor‑market impacts remain unstudied. Brazil’s Abono Salarial (1990) replaced Salário‑Família and provides wage and child supplements. Austria introduced the SV‑Bonus in 2020, reimbursing up to €752 of Social Security contributions for low‑wage workers. Ireland’s Working Family Payment (1984) tops up earnings for lower‑income working parents, while Mexico’s Subsidio para el Empleo (2007) was made non‑refundable in 2024. Spain’s Incentivo al Empleo, launched in 2023, varies by family size and reduced the rate at which benefits phased out for low-wage workers. Within Spain, the Basque Country’s Renta Complementaria de Ingresos de Trabajo began in 2013; it tops up low wages so that take-home pay reaches €1,460 a month for singles, €1,760 for couples, and €1,958 for three-person households. Malta’s In-Work Benefit, launched in 2015, gives working families up to €1,550 per child a year on earnings up to roughly €35,000. Luxembourg restructured its employee tax credit in 2017, adding an extra credit for minimum‑wage earners. Australia’s non‑refundable Low‑Income Tax Offset (1993) subsidizes earnings by up to A$700 a year. Poland’s 2022 reform introduced an “amount‑decreasing” income tax offset that eliminates income tax for very low earners, and the Slovak Republic pays a refundable monthly child‑tax bonus that rises with parental earnings. The Prime pour le travail in the Canadian province of Québec (2005; expanded 2023) offers a refundable credit of up to roughly C$3,900, while Czech Republic’s Refundable Child‑Tax Bonus (in place since 2007 and uncapped since 2021) turns any unused portion of the child credit into a cash payment for low‑income workers. Mauritius introduced a Negative Income Tax (NIT) in 2017, which provides a refundable credit for low-earners that decreases as monthly earnings surpass MUR 5,000, reaching zero at MUR 9,900.

Program design matters. Policies that effectively encourage work and reduce poverty feature generous phase-in rates, high subsidies that reward entry, and gradual phase-outs that avoid the high marginal tax rates that discourage additional work. Targeting benefits to individuals rather than households encourages second earners—especially women in dual-parent families—to join the workforce. In Israel’s EITC, where eligibility is individual-based, labor supply rises among married secondary earners since families aren’t penalized when both partners work; by contrast, family-based eligibility in the U.S. and many European countries can create small disincentives for second earners (Brender & Strawczynski 2020; Eissa & Hoynes 2004).

The international evidence is clear: EITC-style wage subsidies are effective. They raise employment—especially among single parents and other marginal workers—across a wide range of economic systems and welfare states. While program details can amplify or reduce their effectiveness, the broad takeaway is that “make work pay” policies have a solid track record. For policymakers looking to reduce poverty and bring more people into the labor force, these programs remain one of the most evidence-backed tools available.