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

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.

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.

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. !

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

Estimation 1.Difference-in-difference estimates 2.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

Difference-in-difference Methodology Pre-treatmentPost-treatment TreatedAFDC <15FTP <15 ControlAFDC 15+FTP 15+ difference _ −0.086 DD DD Assumptions: “parallel trends” constant treatment effects additivity time treatment effect

Assumptions : 1.No time-limit effects on families over the threshold age 16 for 24-month time-limit 15 for 36-month time-limit 2.Effects of individual reforms are additive : FI + ES + TL 3.Effects of FI and ES are age-invariant. Evidence: i. National Evaluation of Welfare-to-Work Services (NEWWS) ii. Vermont Welfare Restructuring Project (WRP) iii. Minnesota Family Investment Program (MFIP)

Age groups: Group 0 : 6 months - 2 years Group 1 : years Group 2 : years Group 3 : /15 years Group 4 : 15/ years MWRA exemptions unable to identify effects on Group 0

Difference-in-difference Estimates FTP 1 = FTP 2 = − FTP 3 = 0.03 FTP 4 = TL + FI + ES FI + ES FTP 4 > 0 & significant → FI & ES welfare use, all else equal FTP Total = → full sample effect masks variation in age group effects

DD 1, DD 2, DD 3 < 0 DD 2 < DD 3 ( Child care constraints ?)  DD 2 < DD 1 control for pre-sample welfare use → G 2 used less DD 1 = FTP 1 – FTP 4 = DD 2 = FTP 2 – FTP 4 = DD 3 = FTP 3 – FTP 4 = Age-Invariance Assumption Time-limit Effects

I. Step Function Specification y it = α + α 0 A 0it + α 1 A 1it + α 2 A 2it + α 3 A 3it + +τ 0 A 0it E i + τ TL 1 A 1it E i + τ TL 2 A 2it E i + τ TL 3 A 3it E i + + τE i + X it β + μ i + ε it A jit = 1 if youngest child in ith family falls in group j at time t E i = 1 if family i is in FTP group X it : 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.)

II. Linear Interaction Specification y it = α + α 0 A 0it + α 1 A it + τ 0 A 0it E i + τ TL 1 A ′ it E i + τE i + X it β + μ i + ε it [A it − threshold age] if 3 ≤ A it < 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 =

Step Function Results G %-pt G 0 MWRA → welfare use G %-pt (TYCS, vocational training) τ TL 1 < τ TL 2 < τ TL 3 non-price barriers to child care preschool families cannot fully respond to time-limits All groups receive child care subsidies.

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

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.

Additional Estimates 1.Prior welfare use 12 months use & 24 months use – focus most dependent group 2. Shorter follow-up period - 12 months 3.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

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).

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

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.