ppa786: urban policy class 16: welfare programs and principles of welfare policy

PPA786: Urban PolicyClass 16:Welfare Programs and Principles of Welfare Policy

PPA786, Class 16: Welfare Programs and Policy

•Class Outline

▫Welfare Programs

▫Work Incentives

Theory

Evidence

▫Marriage Incentives


•Cash Welfare Programs, TANF

▫Temporary Assistance to Needy Families

Replaced Aid to Families with Dependent Children (AFDC), which was set up in 1935

Provides assistance mainly to single parents

Has work requirements and time limits, which are covered in detail in the next class.


•Cash Welfare Programs, EITC

▫Earned Income Tax Credit

The EITC is part of the income tax code.

It subsidizes wages for the lowest-income earners in the form of a (refundable) tax credit.

The EITC is now the nation’s largest welfare program.

PPA786, Class 16: Welfare Programs and Policy /• EITC Rates (Richmond Fed)

Note: Solid line represents single/head of household filers; dashed line represents married filers.

PPA786, Class 16: Welfare Programs and Policy /• Participation in TANF and EITC (Caputo)


•Cash Welfare Programs, SSI

▫Supplemental Security Income

SSI is a cash welfare program for the elderly and disabled poor—a supplement to Social Security.

It appears to be the main reason that poverty has dropped so much among the elderly.

It is the least controversial welfare program.


Sources of Income for Low-Income Families with Children (Urban Institute)


•In-Kind Welfare Programs

▫Some welfare programs provide goods and services, not cash.

Food Stamps provides coupons that can be used to pay for food.

Medicare (for the elderly) and Medicaid (for the poor) provide health insurance.

Housing assistance subsidizes rents for low-income families.


•In-Kind Welfare Programs, Continued

▫The distinction between cash and in-kind programs can be important.

Some in-kind programs (Food Stamps) are essentially like a cash program.

Others (Medicare, Medicaid, and housing assistance) are different than cash.

The following figures explain this distinction.

Other Goods Per Day0

Food per Day

Cash versus In-Kind Subsidies, Case 1


Indifference curve

Original Budget Constraint

Budget Constraint with Food Stamps

Extension of Budget Constraint with Cash Grant

Choice with Food Stamps or Cash GrantOriginal Choice

Amount of Food Stamps

Other Goods Per Day0

Medical Care per Day

Cash versus In-Kind Subsidies, Case 2


Budget Constraint with Medicaid

Extension of Budget Constraint with Cash Grant

Choice with Medicaid = In-Kind Grant

Original Choice

Choice with Cash Grant

Income Shift That Is Equivalent to Medicaid from Household Point of View


•Work Incentives

▫One of the conceptual issues at the heart of the debate about welfare policy is that of work incentives.

Some welfare programs create financial incentives that discourage work.

This feature may harm recipients in the long run and it undermines support for the programs.

Today we develop conceptual tools; current program details are covered in the next class.

Leisure Hours per Day, L Work Hours per Day

Time Constraint

0 L1

Goods per Day, Y

The Labor-Leisure Choice


Indifference curve

Budget Constraint


Time Constraint

0 L1 L2 L3

Income Effect

Substitution Effect

Slope = -w(1-t)

Guarantee

Goods per Day, Y

Leisure Choice with a Welfare Guarantee and “Tax” Rate



Time Constraint

0 L1 L2L3

Slope = -w(1-t)

Guarantee

Disregarded Income

Goods per Day, Y

Leisure Choice with a Welfare “Disregard”



Time Constraint

0 L1 L4

100% tax rate

Guarantee

Disregarded Income

Goods per Day, Y

Leisure Choice with a Disregard & a 100% Tax Rate



Time Constraint

0

Red= Household Initially on Welfare

Guarantee

Green= Household Initially Not on Welfare

Goods per Day, Y

Impact of Tax Rate Reduction on Aggregate Work Effort



Time Constraint

0 L1 L2

Guarantee

Disregarded Income

Value of Medicaid

Medicaid Notch

Choice without Medicaid Notch

Choice with Medicaid Notch

Goods per Day, Y

The Medicaid Notch Blue = Budget Line with Medicaid Notch Black = Budget Line without Medicaid Notch



Time Constraint

0 L1 L2L3

Income Effect

Substitution Effect

Slope = -w(1+e)

Goods per Day, Y

Leisure Choice with an EITC, 1



Time Constraint

0 L1 L2

Slope = -w(1+e)

Slope = -w(1-t)

Goods per Day, Y

Leisure Choice with an EITC, 2



Time Constraint

0 L1 L2L3

Budget Line After Training or Child Care Subsidy

Slope = -w2

Slope = -w1

Goods per Day, Y

Leisure Choice with Wage Boost or Child Care Subsidy



•Empirical Evidence on Labor Supply and the EITC

▫Many studies find that the EITC encourages labor force participation among unemployed parents (at least without a recession).

▫Many studies find that, despite strong work incentives, the EITC has little impact on the hours worked by employed parents.


•Welfare Reform and Marriage

▫The Negative Income Tax Experiments had a striking finding: Providing cash grants to poor families increased divorce.

▫Most commentators interpreted this finding as showing that financial desperation kept many women in unpleasant relationships.

▫But ever since, there has been a lively debate on welfare reform and marriage.


• Welfare Reform and Marriage, Continued

▫AFDC/TANF clearly discouraged marriage for most recipients.

Adding earnings by a secondary earner cut benefits, and most states did not provide any benefits to married couples (although some had AFDC-UP).

The current time limits cut these incentives greatly.

▫The EITC has complex incentives for marriage.

It encourages marriage for some, discourages it for others.

The overall effects appear to be minimal.


Marriage Rewards and Penalties with the EITC

Source: Ellwood, NTJ, 2000


Source: Tax Foundation

ppa786: urban policy class 16: welfare programs and principles of welfare policy

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policy class

controversial welfare

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