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Welfare and Welfare Reform

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									Welfare and Welfare Reform
Welfare and Welfare Reform

  Table 3.1 Expenditures on Assorted Federal Antipoverty Programs
  (Billions of Real $1999)
                                1970      1975      1980      1985   1990   1995    1999    2010
  AFDC/TANF                     17.5      26.0      24.2      22.6   23.6   24.1    13.4    21.3
  Disability Insurance          13.2      26.1      31.2      29.2   31.6   44.7    51.3
  Supplemental Security Income  12.6      18.2      16.1      17.1   20.5   30.7    29.7
  Food and Nutrition             5.3      19.9      26.4      24.8   23.8   34.8    26.1    73.4
  Housing                        2.2       6.6      11.1      17.7   19.7   30.0    27.6    45.2
  Medicaid                      20.8      39.1      52.1      63.4   92.4   171.0   188.8   216.0
  EITC                           0.0       3.9       4.0       3.2    9.6   28.4    31.9    42.2
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
       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 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
          5th % 10th% 25th % 10th % no kids
%




                                                        income
    Welfare and Welfare Reform

       Assessing Welfare Reform – Effect on Total Income
          5th % 10th%   25th % 10th % 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.

    $w x 4000

    $34,458
                                      slope = -w(0.79)
                                       benefit = $4,306 – w*(hrs-t*)-*0.21



                                                     slope = -w
    $14,050
                                                         benefit = $4,306
    $10,750
                                                           slope = -w(1.40)
                                                             benefit = $w*hrs*0.40

                                            t*      4000      leisure
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-
        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 implicit assumption for the result to be deemed “causal”?

       What is being estimated (in words)?
Earned Income Tax Credit

Table 3.2 Rates of Labor Force Participation
1993-1998

                                           Long-Term AFDC Recipients
                            Single-Parent Familes              Two-Parent Families
                         1993       1998    Difference     1993      1998    Difference
One Child                33.13      46.08      12.95       38.35     56.55       18.20
Two-Plus Children        24.02      43.21      19.19       29.47     56.61       27.14
Difference               -9.11      -2.87       6.24       -8.88      0.06       8.94
                                               (1.97)                           (3.74)

                                          New entrants to AFDC Program
                            Single-Parent Familes                Two-Parent Families
                         1993       1998    Difference       1993      1998    Difference
One Child                42.21      42.06       -0.15        51.75     49.92       -1.83
Two-Plus Children        36.01      39.12        3.11        49.68     53.98       4.30
Difference               -6.20      -2.94        3.26        -2.07      4.06       6.13
                                               (2.62)                             (3.45)



 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?

								
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