Utopia, you are standing in it!

One of the most controversial aspect of the U.S. program changes are the negative incentives – time limits, sanctions, and diversion – that are built into their structure.

All of these policies limit the entitlement to cash public assistance, by either enforcing behavioural requirements (such as work search) or limiting the availability of assistance.

As Besley and Coate (1992) pointed out, linking such requirements with public assistance payments can help deter welfare participation among those who could find a job on their own.

The majority of evaluations of mandatory welfare-to-work programs show significant increases in labour supply and reduced welfare dependency. The drawback is the increase in wage income is greatly offset by the decline in benefit income. In–work tax credits played a major role in making work pay in 1996 U.S. welfare reform

The Minnesota Family Investment Program (MFIP) was implemented in 1994 and provided a strong earnings threshold, allowing women to receive some cash assistance until their earnings reached about 140 per cent of the U.S. poverty line. It also required participation in mandatory job search programs.

A randomly assigned control group remained in AFDC without work requirements or substantial earnings thresholds. MFIP involved both strong negative and positive work incentives. A subset of the treatment group (also randomly assigned) was provided with the earnings thresholds but not the mandatory work requirements.

The MFIP results allow the separate and joint effects of mandatory job search and earnings thresholds to be explored. When only positive work incentives are provided through an expanded earnings threshold, this has little effect on labour supply, consistent with earlier results. The additional income provided by these higher thresholds had strong income-increasing and poverty-reducing effects. Once mandatory work requirements are added to MFIP, then labour supply increases as well, but there is little further effect on income or poverty.

The evaluations of MFIP suggest that the stick of work requirements increases labour supply, but has little effect on overall income as increases in earnings are offset by reduced benefits.

The carrot of greater earnings thresholds provides an income enhancing effect. When used together, there is increased work and higher earnings, along with reduced poverty.

The relatively strong measures to mandate work participation can be effective. Work mandates with sanctions are more effective at inducing work than are more financial incentives. Strict work requirements by themselves may have little income-enhancing effects if they are not combined with some form of wage support for the low-skilled.

Education and training programs do not seem any more effective in promoting labour force attachment and increased earnings than work experience programs. In various welfare reform experiments in the U.S. during the 1990s, states tested training programs – human capital development programs — against work first programs – labour force attachment programs.

The work-first programs increased earnings and decreased welfare usage faster, while human capital development programs cost more, particularly in the first year when women were training rather than working.

But even three years out, after women from human capital development programs had been in the labour market two years, human capital development participants still did not outperform labour force attachment participants.

This may suggest that the gains to experience among women who have been out of the labour market may be larger than the gains to formal education and training. Employment outcomes did not seem significantly worse among less skilled participants or participants with identifiable barriers to work, such as child care or health problems. Learning by doing and job match and job search capital are major sources of hard-to-measure post-school human capital and wages growth even for less skilled workers. Work-first programmes suggest that the reward from working which is human capital as well as wages are greater than an investment in time away from working to train.

The dual emphasis in the U.S. welfare reforms on positive work incentives and more punitive work mandates seems to have been important.

Work mandates (mandatory welfare-to-work programs, backed by sanctions and time limits) forced more people into work faster than would have naturally left welfare even strong economic environments. With low wages and (often) part-time hours, many welfare leavers would have gained little in income without subsidies to low-wage work. Reduced earnings thresholds, the expanded EITC, and subsidies to assist with child care or other work related expenses, all helped make work pay.

Diagrams HT: rand.org Conflicting Benefits Trade-Offs in Welfare Reform by Jeffrey Grogger, Lynn A. Karoly, and Jacob Alex Klerman (2002).