Welfare, Employment, and Income: Evidence on the Effects of Benefit Reductions from California

Abstract

In recent years there have been unprecedented changes in welfare. The 1996 Personal Responsibility and Work Opportunity Reconciliation Act abolished AFDC and created Temporary Assistance for Needy Families (TANF), a set of block grants that gave states nearly complete freedom in designing their welfare programs. Between March 1994 and March 2001, welfare caseloads fell 59 percent, to 2.1 million families from 5.1 million. These changes in welfare caseloads mirror changes in employment rates of single women, which rose to 76.5 percent in 1998–1999 from 67.5 percent in 1989–1990. After a recession early in the decade, the economy experienced the longest economic expansion in U.S. history beginning in March 1991, with GDP growing for 120 consecutive months. The unemployment rate fell to 4.0 percent in 2000, its lowest level since 1969. With the strong economy, state and federal budgets prospered. The good fiscal climate and the funding and flexibility of TANF allowed many states to expand child-care benefits, health insurance, and transportation services for low-income families and to change welfare rules so that recipients could keep a greater share of earned income than was previously the case. The overwhelming majority of pre-TANF welfare waivers and current state TANF plans employ one or more of the following building blocks: mandatory employment services, earnings supplements, and time limits on welfare receipt. There is a considerable amount of emerging evidence that these changes along with the strong economy and expansion of the Earned Income Tax Credit (EITC) increased employment of low-skilled families (see e.g., Dan Bloom and Charles Michalopoulos, 2001; Jeffrey Grogger, 2001; Hotz et al., 2001; Bruce Meyer and Dan T. Rosenbaum, 2001.) Yet if history is any guide to the future, state policymakers facing deteriorating fiscal climates will contemplate cutting welfare benefits. This paper summarizes results from a larger paper (Hotz et al., 2002) in which we analyze data from an experimental evaluation of welfare reform in California during the early part of the 1990’s. Starting in 1991, California experienced a severe economic downturn. Prompted by the very weak state economy and sharply rising welfare caseloads, California implemented changes in its Aid to Families with Dependent Children (AFDC) program that included, among other changes, a 15-percent reduction in the maximum benefits provided to families on aid. We exploit these data to assess the impact of these changes on the employment, labor-market earnings, and levels of disposable income for low-income households. Because this experiment was run for almost six years, we are also able to assess the long-run effects of the benefit changes. Understanding how welfare reforms, especially benefit reductions, affect employment and financial resources available to poor households is important, given the goal of work-based welfare reforms to move these families toward economic self-sufficiency.