Academic journal article The American Journal of Economics and Sociology

Labor Force and Welfare Program Participation: The Effects of Welfare

Academic journal article The American Journal of Economics and Sociology

Labor Force and Welfare Program Participation: The Effects of Welfare

Article excerpt

I

Introduction

Welfare levels and tax rates affect the decision to apply for welfare as well as the decision of whether or not to work. The decision to participate in the labor force itself is not independent of the decision to participate in the welfare system. It is likely that the decisions are not mutually exclusive. An analysis of either decision can be enhanced by taking into account the other decision.

In this paper, the labor force and welfare program participation decisions are modeled as a joint decision-making process. The impacts of welfare program characteristics and individual-specific characteristics on the joint work/welfare decisions are estimated through the use of a bivariate probit model. The joint-choice modeling approach improves the efficiency of the estimation over the single-equation estimation approach in which the work/welfare participation decisions are assumed to be independent. The precision of the estimates and the validity of the underlying model are important in the evaluation of alternative welfare reform policies.

II

Literature Review

The labor supply effects of welfare programs have been examined in great detail in the literature.(1) Most previous analyses of welfare have either been based on the negative income tax (NIT) experiments or on the Aid to Families with Dependent Children (AFDC) program.(2) The NIT studies have been subjected to various criticism for their use of experimental data.(3) Since AFDC accounts for only about one-half of welfare funding, studies based solely on AFDC payments may not reflect accurately the effects of the entire income maintenance system.(4) The present study is relatively unique in its employment of non-experimental data and comprehensive welfare program information.(5) Welfare in this study refers to the cash or cash-equivalent income maintenance system dependent upon need and not status such as previous employment, retirement age, participation in the post-secondary educational system, physical disability, or successful completion of military service. The programs included in this definition of welfare are AFDC, Food Stamps, Emergency Assistance, General Assistance, and the Low-Income Home Energy Assistance Program. Medicaid is excluded. Although Medicaid is an important and valuable welfare benefit, it does not provide income support per se. Housing subsidies do provide living support, but are very difficult to value. Less than 7% of the sample (12% of welfare recipients) received any form or amount of housing subsidy. Accordingly, any underestimation of cash-equivalent welfare guarantees would be small in magnitude.

The comprehensive welfare system characteristics used in this study were derived by estimation of a modified version of Fraker, Moffitt, and Wolf's (1985) general welfare model. Here, the dependent variable included all previously specified amounts of welfare. In general, welfare payments increase with family size, and decrease with income. Accordingly, welfare payments were modeled as a linear function(6) of the number of children, earned income, and unearned non-welfare income which represents gifts, child support payments, charity, and income generated from the liquidation of capital assets. The equation was of the following form:

[W.sub.i] = [Alpha] + [Beta][K.sub.i] + [t.sub.y][Y.sub.i] + [t.sub.v][V.sub.i] +[[Mu].sub.i] [1]

where [W.sub.i] is the amount of welfare; [K.sub.i] is the number of children; [Y.sub.i] is earned income; [V.sub.i] is unearned non-welfare income; and [[Mu].sub.i] is a random disturbance with mean zero and finite variance. Equation (1) was estimated using a tobit procedure since welfare benefits are left-censored at zero.(7) The parameter estimates from the tobit regression are the change in the expected uncensored welfare payment for a unit change in the independent variable. The welfare model allows a precise estimate to be made for the base amount of welfare that an adult receives, the marginal welfare payment for each additional child, the effective tax rate on earned income, and the effective tax rate on unearned income. …

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