Behavioral Effects from Welfare
The welfare system affects the behavior of people. 634 Like any other economic factor, it does not necessarily affect all people; rather, the effects are detected at the margin. Suppose that a state has a welfare system that pays a mother with two children $500 per month. Suppose further that there are 100 such mothers: 80 who work, and 20 who could work, but have chosen to stay home with their children and collect $500 per month on welfare. Under this very simple scenario, the welfare system has induced 20 mothers to leave the labor force and to enter the welfare system.
Now suppose that this state raises its welfare benefit level by $100 from $500 to $600 per month. Suppose that four mothers drop out of the labor force and go on welfare. Then a 20 percent increase in the welfare benefit level has resulted in a 20 percent increase in welfare participation. The ratio of the relative change in behavior to the relative change in the causal variable is known as the elasticity. Here the elasticity of welfare participation with respect to the guarantee level is 1 (20%/20%).
Economists have studied the effect of welfare benefits on behavior such as welfare program participation and labor force participation. However, two questions arise here. First, what is the effect of welfare on behavior? In other words, if there were no welfare at all, what would the world look like? This question is rarely examined. In a comprehensive review of the literature, Sheldon Danziger, Robert Haveman and Robert Plotnick concluded that the welfare system has reduced the labor supply by 1%, and the social security system has reduced the labor supply by an estimated 4%. 635 The qualitative effect of the Social Security program is far greater than the effect of welfare, however. Social Security affects the nation's most-experienced laborers, while welfare affects the nation's lowest-skilled workers. Social insurance expenditures in 1990 totalled $513 billion versus $146 billion for public aid. 636 The nation spends far more money on social insurance than