The 1993 EITC expansion and low-skilled single mothers’ welfare use decision

Abstract

Previous studies on low-skilled single mothers focus generally either on the binary welfare use or work decision. However, work among welfare participants has increased steadily since the mid-1990s. This study estimates the role of the 1993 Earned Income Tax Credit (EITC) expansion on the decline of welfare caseloads using a bivariate probit model. Using monthly Survey of Income and Program Participation (SIPP) information, I find that the 1993 EITC expansion has at least the same effect on reducing welfare use as the welfare reform initiatives. Moreover, the elasticity estimates indicate that single mothers, especially those who were not employed and dependent solely on welfare before the expansion, were the most responsive to the policy initiatives. Finally, the increase in work among welfare participants is due to the relative ineffectiveness of the policies in reducing the net population of those who are on welfare and work simultaneously.

Keywords:

• EITC expansion
• welfare use
• work
• single mothers

JEL Classification::

• I38
• J18
• J22

Acknowledgements

The author wants to thank Meta Brown for her guidance and encouragement. The author is grateful for valuable suggestions from Professor John Karl Scholz and Professor John Kennan. The author would also like to thank to Robert Gregory, Xing Meng, Binzhen Wu and all participants of the University of Wisconsin Public Workshop and 2006 International Symposium of Contemporary Labor Economics at Xiamen University. All errors are the author's own.

Notes

¹ Under certain conditions, states can grant exemptions from the time limit requirement, so long as the total number of such exemptions does not exceed 20% of the state welfare caseload.

² The sample includes all single mothers who received no more than 12 years of schooling and whose children are no older than 18 years. They are hence potentially eligible for both the EITC and welfare programs. Employment is defined as having reported more than 10 hours of work in a week in the previous month.

³ Measured by earnings, more than three quarters of low-skilled working single mothers in SIPP are eligible for EITC. Nationally, about 80–85% of the eligible families filed the credits, with an average received credit at $1700. Note that credits received and filed are generally not the same. About 13% of the filed credits are used to offset the tax owed. See http://www.taxpolicycenter.org/taxfacts/papers/irs_eitc.pdf for a further discussion on the assessing methodology.

⁴ The restriction of the identification strategy is that I can only assess the effectiveness of the 1993 EITC expansion on families with more than one child by the different treatments from families with one child. However, the EITC program has been steadily expanded since 1986. It would be of interest to evaluate the overall effectiveness of the EITC program by comparing eligible families who were affected (mostly have children) to similar families that were not eligible (such as childless single women).

⁵ The samples consist of female heads of households between 19 to 44 years from March CPS during 1984 and 1996. They study the effects of changes to the EITC and other taxes, as well as pre-reform welfare policies on a single woman's work decision. Their primary focus is on the effects of changes in monetary incentives. In their research, work is defined by whether a single mother worked last week or whether she worked at all last year.

⁶ In another specification, they also compare the difference between single mothers with two or more children and (i) single women with no offspring (or with their youngest child older than 18) and (ii) single mothers with only one child. The rationale for this comparison is that the first group is not eligible for the EITC (nor AFDC), and the second group faces a different EITC scheme since the 1993 expansion. The results are similar.

⁷ In their sample, each single mother is observed consecutively for 4 years. Work is defined as either having reported earnings to the Unemployment Insurance (UI) system in a given year or having earnings exceeding $500 and $1000 in the year.

⁸ As families with two or more children enjoy a much larger increase in the EITC that they can earn beginning with the 1993 expansion than their one-child counterparts, the effect of the EITC, holding everything else constant, should be greater for the former group.

⁹ Furthermore, using tax data, they find that EITC-claiming behaviour mirrors the employment pattern in the data. Also, there is no significant difference in tax filing behaviours between families with two children and families with more than two children. These findings reinforce the validity of their identification strategy.

¹⁰ Grogger and Michalopoulos (2003) study the effect of welfare time limits using data from a randomly designed experiment in Florida's Family Transition Program.

¹¹ Not all states adopted a time limit of 60 months. See Table 2 for the exact length in each state. In this study I use the exact lengths and dates listed in Table 2 to construct all time-limit variables.

¹² Interestingly, they find that higher EITC credit is associated with a higher likelihood of using TANF.

¹³ Thanks to Professor John Karl Scholz for pointing out this issue.

¹⁴ I combine 1990, 1991, 1992, 1993 and 1996 panels to form the sample. See a further discussion in Section V.

¹⁵ One would expect that the ratio (of work, welfare) decreases as we restrain the definition of work. If work is defined as having worked for more than 120 hours a month (i.e. 30 hours per week), welfare participants who worked in the previous month decrease from 16% to 9%. Also, one may worry about the accuracy of the welfare office in keeping track of applicants’ work status. In the GAO 1996 report on welfare waiver implementation, it is mentioned that keeping accurate records of welfare eligibility was the main goal of welfare offices.

¹⁶ Since Hotz et al. include a mother's fixed-effect in the probability model, only mothers who have changed status during the sample period are included in their estimation. As a result their identification comes from families that change status from one child to two or more children or vice versa. A different way to estimate the effect of the EITC program is by using the annual variation in the tax rates. Assuming that the effect of the effective EITC tax rate is continuous, Meyer and Rosenbaum (2001) study the effect of the EITC program on single mothers’ work decisions, while Grogger (2003) focuses on the welfare use decision among single mothers. As the effective EITC tax rate is determined by how much a single mother earns in labour income in a given year, it is endogenous. Meyer and Rosenbaum (2001) calculate an ‘expected tax’ that a woman would pay in a given state and year with a given family composition and ages of children, derived by integrating over distributions of single mothers’ wages and hours. On the other hand, Grogger (2003) uses the different levels of maximum EITC benefits faced by families with different numbers of children.

¹⁷ 14 states included a time-limit in their waivers before 1996, while all states were required to have welfare time limits after 1996. Table 2 sets out the information on state waivers and TANF. Note that Michigan and Illinois use state funds to pay for welfare benefits after participants reach 60 months. As a result, they essentially have no time limit.

¹⁸ Using a linear probability of marriage decision of single mothers shows that the expansion is associated with an increase in a mother's likelihood to marry by a small, yet significant, 2.4 percentage points. Also, as the expansion sharply increases the credit gap between one-child families and those with two or more children, single mothers with one child may want to have another child. Estimates of the childbearing decision among low-income mothers show that the expansion does have a significant, but small, positive-effect.

¹⁹ All monetary terms are deflated into real 2000 dollars by Personal Consumption Expenditure Deflator (PCED).

²⁰ I also estimate the model using a sample of single mothers drawn from NLSY 79, which enables me to control for the county-level socioeconomic factors that may affect a single mother's decisions. I control for unemployment rate, proportion of female headed households to total number of households, per capita transfer payments and county poverty rate among female heads. But the results are similar to those reported in Section VI.

²¹ Given the relatively short panel lengths of different SIPP panels, the effects are mostly estimated through comparisons between mothers from different panels. This is one disadvantage of the SIPP compared to long panels such as NLSY 79.

²² SIPP 1990 spans from October 1989 to August 1992, while SIPP 1996 panel spans from December 1995 to February 2000.

²³ Note that SIPP 1996 panel ended in March 2000. As a result, fewer observations come from year 2000.

²⁴ There are two potential reasons of insignificant estimates of the effects of welfare time limits on welfare use. First, yearly effects of EITC reduce degrees of freedom. Indeed, when we estimate the average EITC effect in Table 6, a welfare time limit significantly reduces welfare use of mothers with youngest children. Second, the bivariate probit assumption may contribute to the insignificant result. In fact, I replicate the significant decrease in welfare use result of Grogger (2004) using linear probability. See Table 9 and more discussions below.

²⁵ The average EITC effect is estimated by a DD estimator where a 1993 Plus indicator, rather than annual indicators, is used as the first difference.

²⁶ Note that the definition of work used here is having reported 10 hours or more of work a week in the previous month. The higher the condition is, the lower the ratio will be of people qualified as ‘working’.

²⁷ By the estimation framework, we are only able to know the net effects of the policy changes on these alternatives. One potential explanation of the ineffectiveness of the EITC expansion on the (welfare, work) alternative is that as the EITC increases the likelihood of work (an increase in (welfare, work), holding welfare constant), it also reduces that of welfare use (a decrease in (welfare, work), holding work constant).