NBER WORKING PAPER SERIES EVALUATING …

1 nber WORKING PAPER SERIESEVALUATING welfare reform IN THE UNITED STATESR ebecca M. BlankWorking PAPER 8983 BUREAU OF ECONOMIC RESEARCH1050 Massachusetts AvenueCambridge, MA 02138 June 2002 This PAPER was commissioned by the Journal of Economic Literature . Thanks are due to Lucie Schmidt andto Elizabeth Scott for excellent research assistance, and to Jeffrey Grogger, Charles Michalopoulos, RobertMoffitt and an anonymous referee for comments and advice. The views expressed herein are those of theauthor and not necessarily those of the National Bureau of Economic Research. 2002 by Rebecca M. Blank. All rights reserved. Short sections of text, not to exceed two paragraphs, maybe quoted without explicit permission provided that full credit, including notice, is given to the welfare reform in the United StatesRebecca M.

2 BlankNBER WORKING PAPER No. 8983 June 2002 JEL No. IABSTRACTThis PAPER reviews the economics literature on welfare reform over the 1990s. A brief summaryof the policy changes over this period is followed by a discussion of the methodological techniquesutilized to analyze the effects of these changes on outcomes. The PAPER then critically reviews theeconometric and experimental literature on caseload changes, labor force changes, poverty and incomechanges, and family formation changes. A growing body of evidence suggests that the recent policychanges have influenced economic behavior and well-being in a variety of ways. One particular set of new-style welfare programs seems to show especially promising results, with significantly increasedwork and earnings and reduced M. BlankGerald R. Ford School of Public Policy440 Lorch Hall611 Tappan StreetUniversity of MichiganAnn Arbor, MI 48109-1220and NBERTel: 734-763-2258 Fax: 3 Over the 1990s the United States fundamentally changed the structure of its public assistance programs to low-income families.

3 These policy changes have, in turn, generated a growing body of economic research that has evaluated their effects. This article reviews the major changes in welfare programs over the 1990s and critiques some of the key methodological approaches and results in areas where a substantial economic research literature has accumulated. I particularly focus on areas where the new research contributes to long-standing debates. It is worth noting that the policy changes have been much discussed in other countries and the evaluation literature from the may be increasingly relevant to policy debates elsewhere. For instance, in 1996, Canada gave provinces greater discretion over their social assistance programs, similar to changes the As we shall discuss below, Canada enacted a very interesting demonstration program in the 1990s (the Self Sufficiency Project), designed to move women on welfare into work.

4 In 1999, Great Britain enacted the WORKING Families Tax Credit, a generous tax credit for low-income WORKING families, similar to the Earned Income Tax Credit program. Some communities in Germany are imposing time limits on the receipt of public assistance (Feist and Sch b, 1998). In contrast to earlier decades, when the different design and lower generosity of social welfare programs led policies to be dismissed as irrelevant or aberrant by other westernized nations, during the 1990s many of these countries watched the welfare experiments with great 1 Not discussed here are social insurance programs such as Social Security or Unemployment Insurance, around which there has also been a great deal of trans-Atlantic conversation.

5 4I. Federal Changes in welfare Programs Over the 1990s The enacted major welfare reform legislation in August, 1996. The Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) passed with a relatively high degree of bipartisan support. President Bill Clinton had, however, vetoed two earlier versions of this bill and it remained controversial. Several of his senior advisors resigned in protest when he signed PRWORA into The major provisions of PRWORA included: Devolution of greater program authority to the states. PRWORA replaced the federal Aid to Families with Dependent Children Program (AFDC) the primary cash assistance program for low-income families -- with the Temporary Assistance for Needy Families (TANF) block grant. This essentially removed almost all federal eligibility and payment rules, giving states much greater discretion in designing their own cash public assistance programs.

6 This also eliminated a federal entitlement to cash assistance. States could choose which families they supported. Changes in financing. TANF replaced a matching fund arrangement under AFDC, in which federal funding moved up or down with state funding. The TANF block grant was fixed and the contribution for each state was determined by the federal AFDC matching grant contribution in the years prior to PRWORA. States were required to maintain at least 75 percent of their previous state spending levels on AFDC in order to receive the full block Ongoing work requirements. By 2002, at least 50 percent of all recipient families and 90 percent of two-parent families were required to be WORKING or in work preparation programs, although states were given great discretion to design and implement these programs.

7 The law treated caseload reductions as similar to work, however. Thus, a state which reduced its caseload by 50 percent would meet its work requirement, regardless of how many current or former recipients were actually employed. Incentives to reduce non-marital births. There was more rhetoric than program in the legislation in this area, but three of the four stated goals of PRWORA involved reducing non-marital births and encouraging marriage. States that reduced out-of-wedlock child bearing without raising abortion rates qualified for special bonuses. 2 For a detailed description of the events leading up to this legislation, see Weaver (2000). For further discussion about the provisions of PRWORA see Blank (1997b) or Blank and Ellwood (2002).

8 Moffitt (1999b) discusses the factors behind PRWORA s passage. Moffitt (forthcoming) provides a more detailed summary of the changes from AFDC to TANF. 3 Not included in this PAPER is any discussion of the public finance literature that investigates the potential impact of block grants on welfare funding. For a good overview of these issues, see Chernick (1998). 5 Five year maximum time limit. PRWORA set a lifetime limit of 60 months on the receipt of TANF-funded aid. States could exempt up to 20 percent of their caseload from this limit, could set shorter time limits if they chose, or could continue funding assistance to families entirely out of state funds after 60 months. Although this PAPER will focus less on these issues, PRWORA also imposed additional limits on eligibility for Food Stamps and Supplemental Security Income (SSI, the cash assistance program to low-income aged and disabled individuals) among certain populations.

9 Legal immigrants who arrived after August 1996 were largely denied access to TANF and to these other programs; the impact of this policy change will grow over time as an increasing share of immigrants will have arrived post-PRWORA. Finally, PRWORA made changes designed to encourage greater paternity establishment and more payment of child support by absent parents. While the 1996 legislation has received the most public attention, it was preceded by a variety of earlier and significant changes. Growing dissatisfaction with AFDC had led an increasing number of states to seek waivers from the AFDC rules. These waivers were mostly designed to allow states to more stringently enforce work requirements for welfare recipients. Such waivers had started under President Ronald Reagan, but the Clinton Administration actively encouraged more expansive state-wide waiver programs.

10 As a result, by the time PRWORA passed, 27 states had major state-wide waivers in place. Most of these states designed new TANF-funded welfare programs that were closely based on their waiver experiments, although virtually all waiver states used their new discretion under PRWORA to make additional program changes. All of these waiver programs had to be seriously evaluated by the states that implemented them. The Department of Health and Human Services (HHS), which 6approved and administered the waivers, typically required some form of random-assignment evaluation. Over time, this generated a body of literature about welfare -to-work programs that was crucial in convincing people that such programs could have positive effects on earnings and labor supply and negative effects on welfare spending.