Welfare and Welfare Reform

AFDC (Aid for Families with Dependant Children) Cash Welfare 87% of funds generally went to those who would be poor Targeted at single mother families (officially benefits could be cut even if a man was found in the house)

Welfare and Welfare Reform Work incentives under AFDC Prior to 1968, benefit payments decreased $1 for every $1 earned , benefit not affected by first $30/mo. of earnings, after that benefit payment reduced by $2 for each $3 earned , first 4 months of earnings didn’t affect benefit payment, after that, benefit payments decreased $1 for every $1 earned. What would this mean about budget constraint and choice problem?

Welfare and Welfare Reform By early 1990s many critics charged that the welfare system (especially AFDC) was actually making poverty worse. Encouraged single parenthood, discouraged work This created a “culture of poverty” The longer one is on welfare, the harder it is to get off. Passing on welfare dependence to next generation. Studies of this provide mixed evidence, mostly because these things are hard to identify. Heterogeneity vs. state dependence. “Reflection” problem

Welfare and Welfare Reform Welfare Reform 1992 Clinton ran on “ending welfare as we know it” 1996 Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA). Beginning in 1992, states could experiment with welfare regulations but still be funded via Federal Government. 29 states did so.

Welfare and Welfare Reform By 1996, Federal government replaced AFDC with TANF (Temporary Assistance for Needy Families) Essentially, Feds provide a block grant to each state, and state then determines how to use it. Comes as a block grant (not dependant on number of people enrolled), so states have an incentive to reduce welfare roles, since any overspending must come from state budget, and any savings can be used for state tax relief. Block grant does not depend on state of the economy. Like AFDC, only available to families with kids under 18. The two most notable components of TANF are: work requirements time limits

Welfare and Welfare Reform Work Requirements Many of the states have implemented much smaller benefit reduction in response to earnings than was true under AFDC (e.g. benefit only reduced by $0.33 for each $1 earned) This helps encourage more work (graph)

Welfare and Welfare Reform Work Requirements (cont) There are also explicit work rules. Under AFDC, mothers with children under 3 yrs old were exempt from any work requirement, TANF lowered this to one year old (some states even lower) After two years of receiving TANF, unmarried recipients must work at least 30 hrs/week to maintain eligibility. At least 50% of recipients must meet these requirements to keep funding. Up to 12 months of vocational training can count, which is somewhat controversial (given job training literature).

Welfare and Welfare Reform Time Limits TANF has a limit of 60 months (5 yrs) lifetime. However, states can provide non-cash support (subsidized with TANF funds) to people longer than that. States can also exempt up to 20% of their caseloads. 23 states used 60 month limit, 17 chose shorter, 8 use own funds to provide longer. Idea is to provide correct incentives to work and/or invest in self- sustaining human capital. Concern is that “a million kids will go hungry”

Welfare and Welfare Reform Other issues Child support – Under AFDC, half of child support payments went back to state for those on welfare. TANF not only set up a better tracking system to enforce child support, but also all of child support goes to custodial parent. TANF increased money for government child care. Case workers were trained differently and expected to become more like case managers, figuring out solutions and helping clients get back into labor market. One controversial aspect is that PRWORA limited benefits to only immigrants who have legally been in US for 5 yrs or more. In general, welfare reform was a pretty radical policy change. Some aspects are very in line with economist thinking, some things are purely political.

Welfare and Welfare Reform Assessing Welfare Reform – Effect on Caseload

Welfare and Welfare Reform Assessing Welfare Reform – Effect on Labor Force Participation

Welfare and Welfare Reform So can we say welfare reform was a success?

Welfare and Welfare Reform Assessing Welfare Reform – Effect on Total Income

Welfare and Welfare Reform Assessing Welfare Reform – Effect on Total Income 10 th % no kids5 th % 10 th % 25th % income %

Welfare and Welfare Reform Assessing Welfare Reform – Effect on Total Income 5 th % 10 th % 25th %10 th % no kids income %

Earned Income Tax Credit Earned Income Tax Credit (EITC) Tremendous growth and expansion in this program over last 15 years. Eligibility and especially benefit levels were expanded dramatically in the mid-1990s. Essentially provides an earnings subsidy via the tax system.

Earned Income Tax Credit Earned Income Tax Credit (EITC) Worker with no children - benefit rate was 7.6% of earnings, to a max of $390 for those earning $5100. From $5100 to $6400, benefit stays at $390. Benefit then reduced by 7.6% of earnings for earnings beyond $6400, meaning no benefit if earnings exceed $11,490. Worker with 1 child - benefit rate was 34% of earnings, to a max of $2,604 for those earning $7,650. From $7650 to $14,050, benefit stays at $2,604. Benefit then reduced by 16% of earnings for earnings beyond $14,050, meaning no benefit if earnings exceed $30,338. Worker with 2+ children - benefit rate was 40% of earnings, to a max of $4,306 for those earning $10,750. From $10,750 to $14,050, benefit stays at $4,306. Benefit then reduced by 21% of earnings for earnings beyond $14,050, meaning no benefit if earnings exceed $34,458. For married – the range where credit is flat and maximum income to receive benefit $1,000 higher.

Earned Income Tax Credit So how are work incentives affected by this program? Let’s look at the implied annual budget constraint for a person with 2+ kids who can make $w/hr in the labor market.

Earned Income Tax Credit So how are work incentives affected by this program? Let’s look at the implied annual budget constraint for a person with 2+ kids who can make $w/hr in the labor market. $10,750 $14,050 $34,458 $w x leisure slope = -w(1.40) benefit = $w*hrs*0.40 slope = -w benefit = $4,306 slope = -w(0.79) benefit = $4,306 – w*(hrs-t*)-*0.21 t*

Earned Income Tax Credit So how are work incentives affected by this program? To look at this question, we must first understand: Income Effect Substitution Effect How will it affect utility/well-being for the poor?

Earned Income Tax Credit How can we evaluate effect of EITC on labor supply? Compare hours worked by those eligible for greater EITC benefit to those who are not? Compare hours worked by those eligible for greater EITC benefit (two or more child families) to those who are eligible for lesser benefits (one or no child families)? Compare change in labor supply for those eligible for EITC as benefit increases over time?

Earned Income Tax Credit Hotz, Mullin, Scholz use a Difference-in-difference (diff-in-diff) approach (combines above ideas) Exploits the fact that pre-1994, EITC payments did not differ much by number of children, but after 1994 there are big differences. Compare change in labor supply behavior of 2 child parents pre- post to a similar change in behavior for 1 child parents. Effect of increased benefit = (avghrs post, 2 child - avghrs pre, 2 child ) - (avghrs post, 1 child - avghrs pre, 1 child ) What is implicit assumption for the result to be deemed “causal”? What is being estimated (in words)?

Earned Income Tax Credit What does this table tell us about the importance of accounting for selection and time trends in this context?

Welfare and Welfare Reform In-Kind vs. Cash Transfers In 1999, far more was spent on food and housing aid (“in-kind” aid) than standard cash welfare (AFDC/TANF and SSI). What is argument against in-kind aid? What are arguments for in-kind aid?