Welfare Reform at Age Ten: What’s Working, What’s Not

Not since their introduction in the New Deal have the nation’s social safety net policies been so radically transformed as they were in 1996 with the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA). That legislation eliminated the entitlement to cash assistance for poor mothers with children, an entitlement in place since the 1930s, and instead imposed work mandates and time limits in exchange for government financial support. The changes did not occur without sometimes fierce debate. Some argued that limiting cash assistance to five years and mandating work would be ultimately harmful to women and their children, while others argued that families would benefit from the structure and income that come from work. The effects of reform have been carefully monitored by both sides of the debate, generating numerous large-scale, rigorous studies, which Jeffrey Grogger and Lynn Karoly synthesize in their seminal volume Welfare Reform: Effects of a Decade of Change (Harvard University Press, 2005). Welfare Reform: Effects of a Decade of Change by Jeffrey Grogger and Lynn A. Karoly; 2005; Harvard University Press.

In designing PWRORA, welfare reformers took on several conditions that they believed the existing welfare policies either caused or contributed to, including single parenthood, teen pregnancy, and dependency on government support. The reforms, therefore, were multifaceted, with incentives to curb childbearing (such as family caps) or encourage marriage, or to reduce dependency by allowing a woman to keep a portion of her welfare check while she worked. And of course they encouraged work, with time limits for assistance and work mandates. These policies were accompanied by a “stick” of sanctions should the recipient fail to comply with regulations.

Grogger and Karoly assemble and summarize the findings from studies that attempted to isolate, either through random assignment or rigorous observational approaches, the effects of specific reform policies on the economic prospects of families, on family structure, and on child well-being. A second goal was to determine whether economic models of behavior can accurately predict policy effects. Such ability is critical if economic theory is to guide predictions about the potential of future welfare reforms.

Effects on Welfare Use, Employment, and Income

Based on the studies reviewed, the authors conclude that welfare policies have by and large promoted work, but they differ in the extent to which they reduce welfare use and increase income. As a general rule, the policies—financial incentives, work mandates, and time limits—either increase employment and reduce welfare use or they increase employment and raise incomes, albeit only modestly. No mix of policies achieves all three.

Financial incentives raise incomes as they increase employment because they allow recipients to keep more of their welfare benefits as their earnings rise. The trade-off is greater welfare use. Work mandates, in contrast, reduce welfare use as they raise employment, but they have little effect on income. Apparently the increased earnings from work offset the loss of welfare benefits. In a system in which benefits are cut nearly dollar for dollar as earnings rise, this result is not surprising. The only way to mandate work and increase income is to combine the policies with strong financial incentives. However, here again, the cost is higher welfare use.

Some of the effects of time limits are less clear. In general, they appear to reduce welfare and increase employment. However, only one study has examined time limits’ effect on income, and the results were statistically insignificant.

Effects on Marriage, Childbearing, and Children

Another focus of welfare reform policies is to encourage marriage and discourage single-mother parenthood. In general, the authors conclude, the research offers little evidence to suggest that reform policies have had a significant impact on marriage or childbearing. The main exception is the Minnesota Family Investment Program (MFIP), which despite its wide visibility remains an outlier.

The lack of sizable effects may result from opposing forces canceling each other out or the policy changes may be just too small to affect such monumental decisions as childbearing and marriage. In addition, marriage and childbearing reflect long-term choices and any effects may not materialize until more time has passed and they begin to affect decisions of future potential welfare recipients.

The effects of welfare policies on the women’s children are also mixed. Young children appear to benefit slightly (as measured by school performance and behavior) from increased family income when their mothers work, while older youth (mainly adolescents) tend to suffer, perhaps because of less supervision or more responsibility for caretaking once their mothers are working.

Here again are trade-offs. Financial incentives tend to raise incomes and thus tend to have a favorable effect on younger children. Such policies, however, do not lower welfare use. In contrast, those policies that reduce dependency on welfare may have more negative effects on younger children given that incomes may decline, or remain unchanged. As noted above, the effects on adolescents are more uniformly negative, regardless of the type of policy reviewed.

Predicting the Effects of Policy Changes

The authors find that the economic behavior models do a fairly good job in predicting outcomes from changes to welfare policies. Models suggest, for example, that work mandates will decrease welfare use and increase employment, and the majority of studies reviewed indeed do find this. Their effects on income, models suggest, may be either positive or negative, depending on whether they raise earnings enough to offset the reduction in welfare payments. Models predict that financial work incentives should increase welfare use and employment, and again they perform as predicted. The final policy tool is time limits, and although less extensively studied, six studies indicate that time limits generally decrease welfare use, especially among families with young children. Three studies show that time limits increase employment, and four show that sanctions have reduced the welfare caseload, all as predicted by the models.

Policy Implications

Clearly, economic theory can help in making predictions about the potential effects of future welfare reforms. As Congress debates whether to raise the mandated number of hours worked and other changes to PRWORA, they may want to turn to economic models to guide their decisions. Grogger and Karoly argue, for example, that the models predict that stiffer requirements, all else equal, would further reduce welfare use and increase employment. Predictions about the effects of policy changes on family income are less clear, however. The findings to date suggest that incomes would remain relatively unchanged unless work requirements are combined with strong financial work incentives.

Even with the ample number of studies, the field has some significant gaps in understanding. Although there is solid evidence on the effects of work mandates, there is much less on time limits, sanctions, family caps, and parental responsibility requirements. Outcomes on poverty, marriage, and child well-being are also limited. Even where evidence exists, most of it is limited to a short (typically two-year) follow-up period, decidedly too short to gauge effects on marriage, childbearing, and children. Finally, the field lacks insights into how reforms have affected families’ decisions to begin receiving welfare in the first place. Limiting the purview to decisions to leave welfare without considering the other half of the equation leaves the field with only a partial understanding.