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The 1993 EITC Expansion and Low-Skilled Single Mothers’ Welfare Use Decision

The 1993 EITC Expansion and Low-Skilled Single Mothers’ Welfare Use Decision. Hau Chyi WISE, Xiamen University. Motivation. Total welfare caseloads decreased to 2.3 million in 1999 from 4.1 million in 1990. Previous literature attribute it to the success of welfare reform during the 1990s

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The 1993 EITC Expansion and Low-Skilled Single Mothers’ Welfare Use Decision

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  1. The 1993 EITC Expansion and Low-Skilled SingleMothers’ Welfare Use Decision Hau Chyi WISE, Xiamen University

  2. Motivation • Total welfare caseloads decreased to 2.3 million in 1999 from 4.1 million in 1990

  3. Previous literature attribute it to the success of welfare reform during the 1990s • This paper intends to investigate the relative effectiveness of the EITC and theinitiatives of the welfare reform

  4. EITC Expansion since 1993 Source: Hotz and Scholz (2001)

  5. Modeling Strategy • Estimate a single mother’s joint probability of welfare use and work • General impression is that welfare participants don’t work. So why is estimating joint distribution necessary?

  6. Distribution of Single Mothers’ (monthly) Four States in NLSY 79

  7. The ratio increased since 1993, indicating policies may have not only decreasedwelfare use, but also promoted work among those who are still on welfare • Looking at marginal probability alone mask the compositional change • Also, estimating joint probability of work and welfare deals with the simultaneous decisions issue

  8. Basic Estimation Framework • Dependent Variables: • Welfare (W) and Work (H) • Four possible states: D • We want to know how EITC and welfare reform affect a single mother’s decisions of choosing each state

  9. Estimation Strategy • D-D estimator of the effect of the EITC program: • 1993 expansion applies only on families with more than 2 kids (treatment group) • Difference between families with one child and those with more than one is substantial • Difference in behaviors between families with 2 or more kids and those with one kid is used to estimate the EITC effect

  10. Source: Hotz and Scholz (2001)

  11. Estimation Strategy • Welfare reform: focus on the five year time limits • Use Grogger and Michalopoulos (2003)’s strategy, families with their youngest children older than 13 are not bound by this restriction • Use the exact year and month to construct the time limit dummy • Year- and state-fixed effects are also added to control for the business cycle and long-run state-specific factors

  12. The latent variable H* can be defined similarly.

  13. Assume • Joint probability distribution can be estimated by a bivariate probit model. • Work and welfare decisions are identified by the effective tax rate of welfare on earnings

  14. National Longitudinal Survey of Youth 1979 (NLSY 79) Follows young adults who were between 14 to 23 in 1979 in the U.S. It has weekly information of hours of work and monthly welfare use information since 1978 Use information from 1985 to 2000 Data

  15. Detailed information is crucial in examining joint decision • Eligibility of the welfare program is checked every month • Annual data, such as March Current Population Survey (CPS), can make it appear that work and welfare decisions are made jointly

  16. Parallel trend assumption

  17. (Correlation Coefficient = -.711)

  18. The Average Effect

  19. To sum up: • the EITC expansion explains roughlyabout 38% of the welfare-caseload reduction among this group of mothers inthe 1990s. • 42% of those who leave welfare due to the EITC expansion werealready working before the expansion. • 37% of the increase in the(no welfare, work) alternative due to EITC expansion is from workers leavingwelfare.

  20. Future Studies • How does welfare reform and EITC expansion affect single mothers’ offsprings?

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