Yes. But it doesn’t count as their earnings, it just reduces the parent contribution. The kid still needs to earn actual income greater than the parental contribution (including imputed rent etc if they live at home, parent provided health insurance, etc).
It can also allow you to avoid the 10% penalty. However, there is no guidance on whether you should pay the penalty if the withdrawal is done in a different tax year from when the scholarship is received (eg a withdrawal the year after graduation to avoid kiddie tax). Many financial advisers say that to be on the safe side, the withdrawal should be in the same tax year as the scholarship. But there’s no indication the IRS actually enforces this as a rule. We are debating this as D18 plans to withdraw 529 money (left over due to her scholarship) in January next year.