NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Incentives Increase Work by Single Mothers


"Increases in the Earned Income Tax Credit account for about 63 percent of the increase in employment of single mothers between 1984 and 1996."

When government policies make it pay for poor, single mothers to go to work, more of them do so. Between 1984 and 1996, policies governing welfare, Medicaid, and taxes were changed dramatically to increase the financial incentives for single mothers to get jobs. The changes worked. Single mothers, particularly those with young children, joined the work force in unprecedented numbers in that time period, according to Bruce Meyer and Dan Rosenbaum writing in Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers (NBER Working Paper No. 7363).

Much media attention has focused on cuts and time limits in welfare and on the implementation of workfare programs since passage by Congress of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. But many policy changes prior to that act increased the financial rewards of working, rather than just cutting welfare benefits, authors Meyer and Rosenbaum note. These policy changes included large expansions of the earned income tax credit (EITC), a program that gives federal money to those working but earning little. For instance, in 1984, the average single woman with children who earned $10,000 that year paid about $100 in income and payroll taxes. By 1996, that average single mother received a $2,000 subsidy for working, mostly due to the EITC.

Increases since 1993 in the tax credit rate and maximum credit were particularly large. Also Medicaid, which pays for medical care for those families with low incomes, was expanded for families with working mothers. Between 1984 and 1994, the number of children receiving Medicaid increased 77 percent, while the number of covered adults with dependent children increased 35 percent. These expansions primarily helped non-welfare families with incomes near the official poverty line, making work more attractive for low-income single mothers.

Another change that took place during this period was the reduction in the implicit tax rate for welfare mothers. In others words, they lost somewhat less of their benefits when they earned other income. Welfare benefits were cut for those not working, but benefits changed little or increased for those balancing work and welfare. Between 1984 and 1996, the real value of AFDC (welfare) and Food Stamps for a woman who did not work fell on average by 7 percent. The amount of benefits received by a working women earning $10,000 rose slightly on average.

Further, four new child care programs were added between 1988 and 1990 to look after the children of welfare mothers going to work and other low income women. Expenditures on job training programs increased sharply in the early 1990s. The programs emphasized education and basic skills. As a result of all of these changes, between 1984 and 1996 the percentage of single mothers working in an average week increased from 58 percent to 64 percent. Or, looking at another measure, the percentage working at all during the year rose from 72 percent to 82 percent. Comparisons with other groups, such as single women without children, married women, and black men, indicate that the increase in single mothers' employment is "a break from historical patterns," the authors write.

Using data from all 50 states and the District of Columbia, Meyer and Rosenbaum estimate that the increases in the EITC account for about 63 percent of the increase in weekly employment of single mothers between 1984 and 1996 and also 63 percent of the annual employment increase. Changes in the maximum welfare benefit and implicit tax rates account for about 26 percent of the increase in weekly employment, and about 14 percent of the change in annual employment. Welfare waivers (time limits, tougher work requirements, termination of cases under certain rules) account for about 15 percent for both weekly and annual employment increases.

Changes in Medicaid, training programs, and child care expansions play a smaller role. But for the amount spent on training and child care, their impact is substantial. Medicaid changes have had little effect.

-- David R. Francis


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