The Swedish Earned Income Tax Credit: Did It Increase Employment?

This paper analyzes the extensive-margin labor-supply effects of a Swedish earned income tax credit introduced in 2007. The reform was one of the government’s flagship reforms to boost employment, but its actual effects have been widely debated. We exploit the fact that the size of the tax credit is a function of the municipality of residence and income if working, which yields two sources of quasi-experimental variation. The identifying variation, however, turns out to be small and potentially endogenous, which means that the question of whether the reform has delivered the hoped-for effects cannot be credibly answered.