Welfare Recipients Respond to Complex Incentives

Featured in print Digest

The impact of the earnings subsidy persisted after the SSP payments ended. Sixty to ninety percent of the entitlement incentive effects persisted immediately post-entitlement, but faded relatively quickly, at a decay rate of about 3 percent per month.

During the 1990s, the Canadian government funded a large-scale social experiment to evaluate the feasibility of a high-powered earnings subsidy for those leaving the welfare system. The program, known as the Self Sufficiency Project (SSP), was targeted to single parents who had been on public assistance for at least a year.

One concern with a benefit like SSP is that it encourages people who would otherwise leave welfare quickly to prolong their stay, offsetting the intended goal of the program. To measure this effect, an innovative experiment was conducted on new welfare applicants as part of the SSP evaluation. This "treatment group" was told that they would become eligible for SSP if they remained on public assistance for a year; a randomized control group instead entered the regular welfare program. The results from this experiment provide the first experimental evidence on the magnitude of the "entry effects" attributable to program benefits offered to welfare recipients.

In addition to the one-year waiting period for potential eligibility, the SSP subsidy offer had a second important time limit: individuals who were still on welfare after a year had only 12 months to find a full-time job and leave welfare. Those who did so became entitled to receive subsidy payments in any month they were working full-time and were off welfare during the next three years. Those who did not lost all future eligibility for SSP and returned to the regular welfare system. Data for the treatment and control groups of the Applicant Experiment were collected for seven years after random assignment, providing information on the short-term and longer-run impacts of the program on welfare participation and labor market outcomes.

In The Dynamic Effects of an Earnings Subsidy for Long-Term Welfare Recipients: Evidence from the SSP Applicant Experiment (NBER Working Paper No. 12774), authors David Card and Dean Hyslop find that the offer of SSP raised welfare participation by 2 to 3 percentage points at the end of the waiting period. In subsequent months, however, the welfare participation rate of the SSP group fell below that of the control group, with a peak impact of about minus 11 percentage points in the period from 24-30 months after initial entry. This impressive gap faded over time, though, and by 84 months out the welfare participation rates of the treatment and control groups were nearly equal.

The authors show that this experiment created three incentives: 1) an eligibility incentive -- for new welfare entrants to remain on welfare for a year in order to become eligible for the subsidy; 2) an establishment incentive -- to find a job and leave welfare within the next 12 months for those people who became eligible for the subsidy; and 3) an entitlement incentive -- to work full time and remain off welfare over the 36 months that subsidy payments were available for those who established SSP eligibility. The authors report that experimental comparisons between the treatment and control groups could not separately distinguish these effects.

Their results further show that the time profile of the experimental impacts in the SSP Applicant study can be explained by a combination of an eligibility incentive (which increased welfare participation during the waiting period), an establishment incentive (which led to a rapid rate of welfare-leaving among members of the program group who satisfied the waiting period requirement), and longer-term entitlement incentives of the program. In particular, most of the impact of SSP soon after the waiting period was attributable to the "establishment" incentive, with about two-thirds of the peak impact attributable to this incentive.

The authors' results helped reconcile the relatively large peak impact observed in the SSP Applicant experiment as compared to other welfare reform programs with universal eligibility. They also offer a simple interpretation for the decline from the 11-percentage point peak effect 27 months after initial entry into the program to about 6 percent by months 40-48. The authors also find that the impact of the earnings subsidy persisted after the SSP payments ended. Their results suggest that 60-90 percent of the entitlement incentive effects persisted immediately post-entitlement, but faded relatively quickly, at a decay rate of about 3 percent per month.

Finally, the authors conclude that nearly all of the people in the treatment group who delayed their initial exit from the program in response to the incentives left within two to three months of the end of the waiting period, and became entitled for the SSP subsidy. Although these delayed exiters were apparently responding to the incentives created by the SSP time limits, leading to an increase in the costs of the program, the authors' simulations suggest that the presence of the delayed exiters has a very small effect on the magnitude of the SSP impacts in later months.


-- Les Picker