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Incentives and the Work Decisions of Welfare Recipients
American Journal of Economics and Sociology, The, July, 2000 by Kevin Duncan
KEVIN DUNCAN [*]
Evidence from the Panel Survey of Income Dynamics, 1981-1988
ABSTRACT. Can work replace welfare? This important policy issue is examined through evidence derived from the Panel Survey of Income Dynamics (1981-1988). Results indicate that welfare recipients supplement the earnings from low paying occupations with public assistance. Further, this income strategy responds to changes in economic incentives. For example, higher wages are associated with a greater probability of working without a welfare subsidy while lower wages are associated with a higher probability of mixing welfare and work. These results underscore the importance of liveable wage levels in providing for a durable substitution of work for welfare. The results also support Solow's recommendation of "packaging" welfare and work for those who find their occupational choices limited to the lower end of the labor market.
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I
Introduction
THE ONGOING WELFARE POLICY DEBATE is split between the view that welfare use breeds dependence and the belief that welfare use, and poverty in general, can be attributed to limited labor market opportunities [see Harrison (1978), Mead (1986), Murray (1984) and Solow (1998)]. Current policy, with emphasis on work requirements and time limits, is consistent with the view that welfare use results in dependency and the best way to end dependency is for recipients to work their way off welfare. However, several studies have found that those who work their way off welfare experience high rates of recidivism. For example, Bane and Ellwood (1986) find that 40 percent of those who leave welfare through work return for another welfare spell. [1] These authors also find that another 40 percent of recipients who worked their way off welfare have incomes below the poverty line in the years after leaving welfare. These findings imply that public policy should not focus exclusively on employment as welfare reform, since mer ely having a job does not guarantee an end for the need, or use of welfare.
Harrison (1978, 1972) provides an explanation of the relationship between the jobs that welfare recipients are likely to hold and repeated welfare use. Put simply, Harrison's explanation is based on the proposition that there are "good" jobs, which offer high pay and employment stability, and there are "bad" jobs, characterized by low wages and high turnover. Since there are not enough "good" jobs to go around, someone will always have to work the "bad" jobs. Further, since discrimination limits access to well paying jobs, some (particularly blacks and women) have constrained labor market choices. Since low paying and unstable jobs do not by themselves adequately provide for a family's needs, the focus is on the income strategies individuals employ. According to Harrison, individuals with limited labor market options will develop strategies of mixing welfare and work to provide for subsistence. This analysis is useful to the ongoing policy debate because welfare is viewed as more than a function of inadequat e work related skills and family choice. It is also a symptom of the occupational structure. Also, this analysis suggests that replacing welfare with work may prove inadequate if the jobs welfare recipients fill do not provide for subsistence.
Recent studies on the working poor help to illustrate Harrison's views on welfare use. For example, Gardner and Herz (1992) note that for about half of the poor women maintaining families, it is some combination of low pay, insufficient hours of work, or periodic unemployment that pushes their income below the poverty line. Faced with these employment and earnings prospects, Harrison's analysis implies that there are two motivations for individuals to mix welfare and work. Welfare can be used to fill an income gap caused by a spell of unemployment. As empirical support for this kind of income strategy, Harrison finds that 92 percent of the respondents from the Panel Survey of Income Dynamics (PSID) who received AFDC also worked at some time over the 1968 to 1972 period. The present study uses the PSID to examine the work and welfare decisions of AFDC recipients over the 1980-1987 period and finds that 80 percent of those who received welfare also worked at some time. While the updated percentage measuring the extent of mixing strategies remains high, it suggests a decrease in the use of this strategy over time. This change can be attributed to the enforcement of the Omnibus Budget Reconciliation Act of 1981 (OBRA) which significantly affected the incentives of this income strategy. The impact of this policy is discussed in greater detail below.
Individuals employed in low paying jobs may also use welfare to supplement their earned income. Data from the subsample of the PSID respondents who participated in welfare at least once over the 1980-1987 period indicate that when individuals worked without a welfare supplement, they earned an average real wage of $5.36 per hour (in 1982 dollars). This wage rate is 67 percent of the $7.99 average real wage earned by U.S. private, non agricultural workers over this period. However, those who mixed welfare and work held jobs offering an average real wage of $4.05 which is 51 percent of the U.S. average real wage for this period. [2] These wage differences not only illustrate the incentive to mix welfare and work, but also point out the need for supplemental income for those who hold low paying occupations.
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