Over the past ten years, public assistance programs have encouraged labor force participation as a route to self-sufficiency. The 1996 Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA, or "welfare reform") and significant expansions in the Earned Income Tax Credit (EITC) created the largest and most studied changes in the work incentives of the poor. However, some smaller programs that may also affect employment among the poor have been largely ignored in the policy discussion. The Work Opportunity Tax Credit (WOTC), introduced in 1996, offers generous subsidies to firms that hire disadvantaged workers, including certain welfare recipients, food stamp recipients, people with disabilities, and others. The similar Welfare-to-Work (WtW) tax credit, implemented in 1998, offers firms potentially larger subsidies for hiring long-term welfare recipients. Although these programs are much smaller than cash assistance or the EITC, the tax credits totaled nearly $500 million in fiscal year 2003 according to the Office of Management and Budget (2005).

The policy goal of the WOTC and WtW is to improve job prospects for individuals who face barriers to employment or are in hard-to-employ groups. While workers may respond to direct subsidies like the EITC by seeking a job, there is concern that employers may still be unwilling to hire some of these workers due to their lack of experience or qualifications. The WOTC and WtW are designed to provide incentives for employers to hire such workers.

This brief provides some policy background on employer subsidies, discusses participation in the WOTC and WtW, surveys the current evidence on the effects of the tax credits on labor market outcomes, and discusses the costs and benefits of the programs. The evidence suggests that the programs are vastly underutilized and have not had a meaningful effect on employment rates among the disadvantaged. However, those relatively few workers whose employers participate do appear to experience a modest earnings increase as a result of the subsidies.