The Historical Impact of Welfare Programs on Poverty: Evidence from the American States

Abstract

Over the years, there has been a spirited debate over the impact of the welfare expansion associated with the War on Poverty. Many analysts have maintained that public assistance expansion during this period decreased poverty by raising the incomes of the poor (an income enhancement effect), while others have contended that welfare expansion increased poverty by discouraging the poor from working (a work disincentive effect). There has been considerable empirical research about the historical effect of welfare on poverty, nearly all of which relies on the poverty rate (i.e., the percentage of persons with income less than the “poverty threshold”) as an indicator of the extent of poverty. However, this work has not employed designs that allow researchers to sort out distinct income enhancement and work disincentive effects. We develop a model of poverty rates in the American states that permits estimation of these distinct effects—based on state‐level time‐series data observed annually for the years 1960–90—and we find that welfare had both effects during our period of analysis. We also calculate the net impact of increases in welfare benefits on the poverty rate—taking into account both work disincentive and income enhancement effects. Our results indicate that this net impact is dependent on three variables: the initial level of cash benefits, wage levels for unskilled workers, and the share of the benefit increase provided through cash rather than in‐kind assistance. Because of historical trends in these variables, since the 1970s welfare spending has become increasingly less effective in reducing the poverty rate. However, the significance of this result for policymakers must be tempered by evidence that flaws in the poverty rate as an indicator of poverty make it so that any finding about the net effect of an increase in welfare benefits on the poverty rate underestimates welfare's ability to lessen the true extent of poverty.