Incentives and the Work Decisions of Welfare Recipients

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

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The other variables, measuring labor force participation, have a mixed effect on the odds of receiving only AFDC relative to combining welfare and work. For example, older recipients are significantly more likely to receive only AFDC while those with a high school degree are significantly less likely to do so. Also, an increase in the rate of unemployment of the state of residence is associated with a significantly higher odds ratio. Only at a lower level of confidence can we say that more years of AFDC are associated with a greater likelihood of receiving AFDC relative to mixing. Finally, the results for the year dummy variables indicate that the odds ratio for years other than 1982 is not significantly different than the base year. The higher benefit-loss rate introduced in 1982 discouraged mixing and had the effect of creating an incentive to move into some other welfare or labor market state. The results of the year dummy variables from equations 1 and 2 indicate that this "tax" change introduced by OBRA had the effect of moving recipients into work instead of receiving only AFDC.

The logit equations were also estimated with multiplicative terms (between the Real Wage and Years of AFDC and Real AFDC and Years AFDC)to test hypotheses from the welfare dependence perspective. For example, AFDC use may change the labor-leisure preferences of recipients in such a way that individuals come to prefer AFDC income to wage income. If this is the case, the effect of the real wage on the relative odds of working and mixing will be a decreasing function of years on welfare. According to the labor-leisure explanation offered above, the coefficient for the interaction term between Real Wage and Years AFDC is expected to be negative. The coefficient for the interaction term is negative, but fails to achieve conventional levels of statistical significance. [11] This result indicates that, given a wage rate, the willingness to work does not vary with time spent on welfare.

Similarly, the welfare dependency view suggests that time on welfare may also shift labor-leisure preferences away from mixing welfare and work and toward receiving only AFDC. If this is the case, the effect of AFDC on the odds of receiving AFDC relative to mixing should be an increasing function of time spent on welfare. Or, the interaction between Real AFDC and Years AFDC should be positive. However, the interaction between Years AFDC and real AFDC income is negative. [12] This finding is not consistent with the notion (stated above) that welfare participation alters the labor-leisure preferences away from work. On the contrary, it suggests that those who have spent more time on welfare are less likely to receive only AFDC relative to mixing. This result may be due to the desire of long term participants to maintain some work activity as part of their income strategy.

VI

Conclusions and Policy Implications

IN THE 1970s HARRISON EMPHASIZED the importance of a wage policy as a complement to welfare reform. This recommendation remains valid. Since working welfare recipients are likely to hold minimum wage jobs, establishing and maintaining a meaningful level of this wage rate would reduce dependency. Others have recommended wage subsidies to address the low wages of working welfare recipients. For example, Solow (1998) has criticized recent welfare reform on the grounds that work requirements will further depress the already low wages of unskilled workers. He recommends a policy of job creation along with the "packaging" of work with a welfare subsidy to provide an acceptable living standard for those receiving low wages. For Solow, such a policy is consistent with the pervasive social value of self-sufficiency and the reality of limited altruism. Snower (1994) and Phelps (1994) also recommend wage subsidies as a substitute for the welfare state. These studies and the present one suggest that if incentives, either in the form of higher wages or wage subsidies, are directed to work activity welfare recipients will, quite rationally, choose employment over public assistance.