Adverse consequences of the earned income tax credit — a $63 billion-a-year federal program — are the subject of an article by Teresa Ghilarducci and Aida Farmand In the American Prospect, who argue that it puts downward pressure on wages. The states have their own earned income tax credits of varying generosity, and the credits are aimed mainly at working parents. That allows for the measurement of their effect:
Research by economist Andrew Leigh and a working paper by one of the authors of this article, Aida Farmand, use state-by-state comparisons to show how wage growth is affected by low-wage supplements. EITC supplements differ by state—in general, California has the most generous EITC supplement, Oklahoma the smallest based on dollars refunded, and some states have nothing at all. Generous states are defined as states that offer a refundable add-on credit greater than 20 percent of the federal credit. State EITCs build on the federal credit to enhance the benefits for eligible workers....we expect to see more wage growth in states with no or a small EITC for ineligible older low-paid workers (55+) compared to older workers in states with larger state-based EITC supplements. The results do indicate that older workers' wages (adjusted for inflation) who live and work in non-EITC-generous states increased almost 1 percent per year from 1991 to 2017, compared to the 0.6 percent inflation-adjusted wage growth of older ineligible workers who worked in generous states.
Correlation doesn't equal causation, and it's possible that the differences in wage growth are driven by something other than the variation in earned income tax credit. For example, liberal states prone to generosity in expanding the EITC may also have tax and regulatory policies that hamper growth. But the EITC is a policy that Republicans, Democrats, the press, and academic and think tank "experts" all tend to like, so it's worth being alert to the possibility that it has some distortive effects and unintended consequences.
Whether the description "generous" is the right term to apply here is another question, considering as how it is being applied to a policy that takes tax dollars from some people and uses it to subsidize some other people for as long as they work low-wage jobs. It is worth noting that the EITC expansion arose to some large degree as a reaction to a welfare policy that offered even worse incentives by paying people not to work at all.