MAKING WORK PAY FOR WELFARE RECIPIENTS

I. INTRODUCTION Welfare dependency has been a vexing social problem in the United States and Canada for several decades. Although welfare originally was designed to provide cash assistance for a small number of families who lacked alternative means of support, caseloads in both countries have grown substantially. Of particular concern has been the growth in the number of single-parent families on welfare.(1) Although the reasons for this growth are complex, research in the United States has suggested that it has followed closely increases in the number of single-parent families headed by women (see Garfinkel and McLanahan, 1986; Moffitt, 1992). Other important explanations include changes in legislation and regulations that have increased the number of families eligible for welfare, a reduction in the stigma associated with being on welfare, and a decline in economic opportunities for poorly-educated persons. Concern about the growth in single parent families on welfare has put welfare reform at the top of the political agenda in both countries. The current emphasis is on promoting work effort among welfare recipients in order to help them achieve economic self-sufficiency. Some observers argue that a major obstacle to the achievement of self-sufficiency under the current system is the presence of strong work disincentives. The work disincentives operate primarily through high benefit reduction (tax) rates that make the economic return to working very low. These same observers argue that unless the system is fundamentally altered to provide incentives to work rather than disincentives, other efforts to encourage self-sufficiency, such as, employment and training services, are likely to be ineffectual. Recognizing the potential importance of financial incentives to work as part of the route to self-sufficiency, several welfare jurisdictions in the United States and Canada are testing financial incentive programs. The financial incentives approach is not a new idea, but only recently have specific proposals been implemented and formally tested to determine whether this approach holds promise. These are not the only proposals for welfare reform that policymakers currently are considering. Both Republican and Democrat lawmakers are proposing a variety of other reform measures that attempt to promote self-sufficiency among welfare recipients. Many of these measures tend to be punitive and involve reducing (or eliminating) welfare benefits. The more prominent proposals being debated would put a time limit on receipt of welfare benefits and would deny benefits to women that bear additional children while on welfare. Under some time-limited proposals, the government would guarantee jobs to family heads who lose their eligibility for welfare. As of this writing, there have been no formal evaluations of the potential of these alternative proposals. This paper describes some of the new financial incentive programs being tested and provides some estimates of their likelihood of success. The programs are taking place in four U.S. states (Minnesota, Florida, Wisconsin, and Vermont), and two Canadian provinces (British Columbia and New Brunswick). Evaluating the programs involves using random assignment experimental designs, but the experimental results will not be available for several years. The Manpower Demonstration Research Corporation and the Social Research and Demonstration Corporation are conducting the evaluations. To inform the current policy debate on welfare reform, this paper provides nonexperimental predictions of the effects of programs in Minnesota, British Columbia, and New Brunswick on income and work effort using a microsimulation model of individual behavior. The simulation estimates also played a role in designing the programs being tested in British Columbia and New Brunswick (Greenberg et al., 1994). II. THE FINANCIAL INCENTIVES APPROACH TO WELFARE REFORM The role of financial incentives in evaluating programs targeted at the welfare population has evolved curiously. …