Welfare and Welfare Reform

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Welfare and Welfare Reform

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Welfare and Welfare Reform

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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
  living in the house)

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Welfare and Welfare Reform

• Work incentives under AFDC
• Prior to 1968, benefit payments decreased 1 for
  every 1 earned
• 1968-1981, benefit not affected by first 30/mo.
  of earnings, after that benefit payment reduced
  by 2 for each 3 earned.
• 1981-1992, first 4 months of earnings didnt
  affect benefit payment, after that, benefit
  payments decreased 1 for every 1 earned.
• How does this impact work incentives (think about
  apple farm)?

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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

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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.

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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 with low incomes (lt 85 of poverty line)
  and low assets (lt 4000).
• The two most notable components of TANF are
• work requirements
• time limits

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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)
• Still work incentive issues, but not as severe
  (think of it as a change in price or a tax on the
  apple farm)

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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).

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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 was that a million kids will go hungry

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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.

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Welfare and Welfare Reform

• How big are TANF payments?
• Size of benefit group Max Monthly
  Benefit Monthly Income limit
• 1 266 768
• 2 357 1033
• 3 447 1297
• 4 539 1562
• 5 630 1828
• 6 721 2092
• 7 812 2357
• 8 922 2622
• 9 1013 2887
• 10 1102 3152
• each additional person 91 265

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Welfare and Welfare Reform

• Assessing Welfare Reform Effect on Caseload

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Welfare and Welfare Reform

• Assessing Welfare Reform Effect on Labor Force
  Participation

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Welfare and Welfare Reform

• So can we say welfare reform was a success?

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Welfare and Welfare Reform

• Assessing Welfare Reform Effect on Total Income

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Welfare and Welfare Reform

• Assessing Welfare Reform Effect on Total Income

10th no kids
5th 10th 25th

income
Pre-reform (c. 1992)
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Welfare and Welfare Reform

• Assessing Welfare Reform Effect on Total Income

5th 10th 25th
10th no kids

income
Post-reform (c. 2002)
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Earned Income Tax Credit

• Earned Income Tax Credit (EITC)
• Essentially provides an earnings subsidy via the
  tax system.
• Tremendous growth and expansion in this program
  over last 15 years.
• Eligibility and benefit levels were expanded
  dramatically in 90s.

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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.

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Earned Income Tax Credit

• So how are work incentives affected by this
  program? To look at this question, we must first
  understand
• Substitution Effect
• Income Effect
• How are work incentives affected by this program
  (compared to what?)
• How will it affect utility/well-being for the
  poor?

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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?

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Earned Income Tax Credit

• Hotz, Mullin, Scholz use a Difference-in-differenc
  e (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- 1994 to a similar change
  in behavior for 1 child parents.
• Effect of increased benefit
• (avghrspost, 2 child - avghrspre, 2 child) -
  (avghrspost, 1 child - avghrspre, 1 child)
• What is being estimated (in words)?
• What is implicit assumption for the result to be
  deemed causal?

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Earned Income Tax Credit

• What does this table tell us about the
  importance of accounting for selection and time
  trends in this context?

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Earned Income Tax Credit

• EITC and the minimum wage
• Why might they be related?

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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?