The Effects of Welfare and Tax Reform

Summary of working paper 8298
Featured in print Digest

The authors find that total consumption by most single mothers increased slightly over the years from 1984 to 1995, and then rose more noticeably after 1995.

Tax and transfer programs targeted at low income families have changed dramatically in recent years. These changes have encouraged work and discouraged welfare receipt. A number of studies have examined how these recent policy changes have affected poor families. Studies of those leaving welfare have found that although more of these individuals are working, a considerable number report difficulty paying for food, rent, or utilities. Despite the fact that employment rates for single mothers rose each year from 1993 to 1998, studies have found that total family income for the poorest single mothers fell from 1995 to 1998, suggesting that losses in transfer income outstripped earnings gains.

In The Effects of Welfare and Tax Reform: The Material Well-Being of Single Mothers in the 1980s and 1990s (NBER Working Paper No. 8298), Bruce Meyer and James Sullivan use data from the Consumer Expenditure Survey and the Panel Study of Income Dynamics to examine how consumption patterns have changed over the past two decades for single mothers and their children. The authors look at family consumption rather than income, arguing that the former better captures well-being, particularly for poor families. Research based on in-depth interviews of single mothers has shown that almost all of them supplement their income with off-the-books work or unreported transfers, which are generally overlooked in survey measures of income. Many transfer programs generate incentives to hide income, and recent reforms have changed these incentives. Thus, the prevalence of this unreported income is likely to be affected by the recent policy changes. Surveys of income also tend to under-report government transfers and fail to capture some in-kind benefits.

Meyer and Sullivan focus on single mothers for two reasons. First, by looking at single mothers, they can examine the effect of reforms not only on participants in these tax and welfare programs, but also on those who may have been diverted from participating in these programs. Second, single mothers represent the group that is most directly affected by the recent changes in tax and transfer policy. Single mothers and their children account for the vast majority of the welfare caseload. They also receive about half of all credit dollars distributed through the Earned Income Tax Credit.

The authors find that total consumption by most single mothers increased slightly over the years from 1984 to 1995, and then rose more noticeably after 1995. From the late 1980s to the period from 1996 to 1998 inflation-adjusted consumption rose on average by more than 8 percent for single mothers. This increase was also evident for the more disadvantaged group of single mothers without a high school degree, as well as for those toward the low end of the consumption distribution.

This rise in consumption occurred during a period of prolonged economic expansion in the 1990s. In an effort to separate the impact of policy changes from the impact of this economic expansion, the authors compare changes in consumption of single mothers to changes for single childless women and married mothers. These groups of women all have similar wages, and this similarity is especially strong when one holds constant educational attainment. This suggests that macroeconomic changes are likely to affect these three groups similarly, while the policy changes are likely to be much more important for single mothers. The authors also account for the fact that changes in macroeconomic conditions may affect these groups differently: they include controls for the unemployment rate at both the state and national level.

After accounting for the effects of differences in demographic characteristics such as age, education, and family size, the authors find that total consumption by single mothers increased relative to both comparison groups. Relative consumption was significantly higher in the period after 1996 than in the late 1980s. The fact that consumption for single mothers and their children increased relative to both comparison groups suggests that only a small part of the increase in the level of consumption by single mothers is attributable to the economic growth that characterized much of this period. The evidence is less clear for changes in relative consumption over the years immediately before and after the passage of the major welfare reform legislation in 1996. However, the authors do find evidence that consumption for single mothers relative to both comparison groups does not fall in the period from 1996 to 1998. Again, these results also hold for more disadvantaged single mothers, although the authors acknowledge that their results do not provide evidence on how consumption has changed for single mothers who are at the very bottom of the consumption distribution.

-- Linda Gorman