Incentives and the Work Decisions of Welfare Recipients

American Journal of Economics and Sociology, The,  July, 2000  by Kevin Duncan

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Next, consider total income determination after OBRA. This act limited the "$30 and one third" exemption to four months and increased the benefit-loss rate to 100%. [5] Note that working through the example in the manner described above, yields a lower income ($397) from work and welfare during the first four months when the exemption applies. This reduction is due to the higher benefit-loss rate (100%) which results in a higher benefit "tax" ($103 instead of $69). Also, when the four-month exemption expires total income from welfare and work decreases to $300 which is exactly the income level if the recipient had not worked at all and only received the basic AFDC benefit. Therefore, OBRA significantly reduced the incentive to work while receiving AFDC as total income could be increased through mixing only for a short period of time.

This example suggests a decrease in the mixing of welfare and work corresponding to the enforcement of OBRA. Table 2 reports the distribution of welfare recipients by source of income for each year between 1980 and 1987. [6] OBRA took effect in 1982 and the data indicate that those who received income from (or mixed) welfare and work were the ones to leave welfare. In 1982 the percent of the PSID sample who mixed decreased, the number working increased and the percent receiving only AFDC remained unchanged. Mixers who had incomes near the threshold level, where an individual no longer qualifies for assistance, may have been better off to leave welfare through work rather than remain on aid and only receive the basic benefit. While OBRA eliminated the incentive to simultaneously mix welfare and work, relying on welfare during spells of unemployment remained a viable income strategy. This may explain why some (18 percent) of the sample continued to receive AFDC and wage income in 1982.

The economic expansion and other OBRA provisions can explain the decrease in the percent receiving only AFDC and the increase in the percent working beginning in 1984. Economic expansion increased job opportunities which were associated with more work and mixing relative to receiving only AFDC. OBRA also allowed states to require work in return for welfare (workfare). As more states took advantage of this option after 1982 the expected result is reduced AFDC use. [7] To separate the effect of policy changes and business cycle trends and to measure the effect of other factors which contribute to the labor market or welfare choices of an individual, the results of logit estimations are discussed in the following section.

IV

Logit Models

HARRISON'S ANALYSIS IMPLIES that the strategy of mixing welfare and work is affected by wage and AFDC benefit levels. That is, lower AFDC levels encourage more mixing and higher wages encourage more work without welfare. To estimate the effect of AFDC benefits and wages on the relative probabilities of receiving only AFDC, mixing or working without welfare the PSID data were pooled over the 1980-1987 period. The general forms of the logit equations used to predict the activity of female AFDC recipients are: