Welfare Dynamics under Time Limits

1. Welfare Dynamics under Time Limits Jeffrey Grogger Charles Michalopoulos Evrim Aydin-Saher

2. PRWORA (1996) AFDC TANF → Time Limits Prediction: Incentive to conserve welfare benefits for future use should be stronger, younger the youngest child in the family.

3. Welfare acts as insurance used to smooth consumption in lifetime utility maximization. Longer the horizon, higher the value of retaining eligibility for such insurance. Eligible for welfare as long as youngest child < 18 years old. Families with youngest children have longest eligibility horizons Fang & Keane (2004) : “option value” Use welfare if benefit exceeds earnings at least by the option value of preserving a month of eligibility.

4. Florida Family Transition Program (FTP) • Randomized experiment, (applying or recertifying), • Waiver from AFDC program rules, • Recruitment : May 1994 – October 1996, • Escambia County (Pensacola) • Time-limit 24 months Exception : poor families → 36 months (48% of sample) • Follow single-parent families for 24 months after random assignment Sample families could not exhaust benefits within the 24-month follow up period. !

6. FTP : Time limits Financial incentives (FI) Enhanced employment & training services (ES) • MWRA exemption age different for the groups • FTP MWRA : recipient /case manager ratio low enhanced employment & training services • All else equal, FI and ES expected to welfare use

7. Estimation • Difference-in-difference estimates • Regression Estimates I. Step Function specification II. Linear Interaction specification Advantages: 1. Controlling for personal characteristics 2. Reducing variance of error term – covariates 3. Alternative functional forms for Age-FTP interaction

8. Difference-in-difference Methodology difference _ −0.086 DD • DD Assumptions: • “parallel trends” • constant treatment effects • additivity treatment effect time

9. Assumptions : • No time-limit effects on families over the threshold age 16 for 24-month time-limit 15 for 36-month time-limit • Effects of individual reforms are additive : FI + ES + TL • Effects of FI and ES are age-invariant. Evidence: • National Evaluation of Welfare-to-Work Services (NEWWS) • Vermont Welfare Restructuring Project (WRP) • Minnesota Family Investment Program (MFIP)

10. Age groups: • Group 0 : 6 months - 2 years • Group 1 : 3 - 5 years • Group 2 : 6 -10 years • Group 3 : 11 - 14/15 years • Group 4 : 15/16 - 17 years MWRA exemptions unable to identify effects on Group 0

12. FTP1 = 0.001 FTP2 = − 0.031 FTP3 = 0.03 FTP4= 0.086 TL + FI + ES FI + ES Difference-in-difference Estimates FTP4> 0 & significant → FI & ES welfare use, all else equal FTP Total = 0.003 → full sample effect masks variation in age group effects

13. Age-Invariance Assumption Time-limit Effects • DD1, DD2, DD3<0 • DD2<DD3 (Child care constraints?) • DD2<DD1 control for pre-sample welfare use → G2 used less DD1 = FTP1 – FTP4 = - 0.085 DD2 = FTP2 – FTP4 = - 0.117 DD3 = FTP3 – FTP4 = - 0.031

14. I. Step Function Specification yit = α+α0A0it+α1A1it+α2A2it+α3A3it+ +τ0A0itEi+τTL1A1itEi+ τTL2A2itEi+τTL3A3itEi+ + τEi+Xitβ+μi+εit Ajit = 1 if youngest child in ith family falls in group j at time t Ei= 1 if family i is in FTP group Xit : exogenous regressors; ( mother’s age, black/white, 2/3 year time limit, number of children in family, mother’s years of schooling, pre-sample welfare use, quarters of employment pre-assignment etc.)

15. II. Linear Interaction Specification yit = α+α0A0it+α1Ait+ τ0A0itEi+τTL1A′itEi+τEi+Xitβ+μi+εit [Ait − threshold age] if 3 ≤ Ait < threshold age 0 otherwise • Family effects (μ) → group-wise dependence → OLS std errors downward biased • Binary dependent variable → heteroskedasticity Huber-White Covariance Matrix Estimator ( Heteroskedasticity-Robust Standard Errors ) A′it =

17. Step Function Results • G0 6.9 %-pt G0 MWRA → welfare use G1 7.4 %-pt (TYCS, vocational training) • τTL1 <τTL2<τTL3 non-price barriers to child care preschool families cannot fully respond to time-limits All groups receive child care subsidies.

18. Linear Interaction Results +1 year age 0.7 %-pts “reduction in likelihood of welfare use” • 36-month, 5 year old → 7 %-pts reduction • 36-month, 13 year old → 1.4 %-pts reduction

19. Main results: • Time-limits substantially reduced welfare use among families with young children. • Anticipatory responses to time-limits, with leaving reducing welfare use well before they could have exhausted their benefits.

20. Additional Estimates • Prior welfare use • 12 months use & 24 months use – focus most dependent group 2. Shorter follow-up period - 12 months • Robustness • urban/rural - job market differences • post-TANF & FTP-TANF – behavioural changes - Oct 1996 • out-of-county mobility – no differential mobility between groups • FI & age-invariance • ES & age-invariance

21. Conclusion • Families with younger ‘youngest children’ less likely to use welfare than families with older ‘youngest children’. • FTP time-limits would have reduced welfare receipt by 16% (reductions weighted by age distributions).

22. Implication • Poverty at younger age → greater adverse effects on educational attainment • Early poverty – ability, adolescent poverty – achievement (Guo, 1998) • Income poverty – preschool ability, later achievement (Duncan et al. 1998) • If welfare reductions income reductions policies with age-neutral effects

23. Further studies • Grogger (2003) : March CPS (1978−99) relative to threshold families, ‘3 years old’ families welfare use 6.6 %-pts, employment 3.4 %-pts • Grogger (2004) : March CPS (1978−99) time-limits reduce welfare use by 6−7 % • Fang and Keane (2004) : March CPS (1980−2002) welfare participation rate 23%-pts time-limits 11% of this decrease.