Session 4: New Policies

PAPER BY Philip K. Robins and Charles Michalopoulos COMMENTARIES BY Christopher Jencks Thomas MaCurdy USING FINANCIAL INCENTIVES TO ENCOURAGE WELFARE RECIPIENTS TO BECOME ECONOMICALLY SELF-SUFFICIENT Philip K. Robins and Charles Michalopoulos I. INTRODUCTION On August 22, 1996, President Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), which radically altered the structure of the welfare system in the United States. Among other things, the act replaced the Aid to Families with Dependent Children (AFDC) program, a federal entitlement, with the Temporary Assistance for Needy Families (TANF) program, a system of block grants to states. One of the primary goals of TANF is to move welfare recipients into work and economic self-sufficiency. Although states were given much flexibility in how to achieve this goal, the federal government imposed some guidelines in the form of requirements that welfare recipients be participating in a work-related (work participation requirements) and time limits on length of welfare receipt. The focus of this paper is on alternative financial incentive schemes that are being used or could be used to help states meet the work participation requirements specified by the federal legislation. In particular, the paper considers whether an earnings supplement conditioned on full-time work would encourage more people to work than the enhanced earnings disregards currently being used or tested by many states. The remainder of the paper is organized as follows. Section II provides a background of the PRWORA legislation and describes methods that states have been using to encourage employment and economic self-sufficiency among the welfare population. The discussion focuses on various financial incentive schemes adopted by the states. Section III describes a financial incentive scheme currently not being used in the United States (but being used on an experimental basis in Canada) that conditions benefits on full-time employment. Section IV discusses how such a scheme might be implemented in the United States. Section V presents estimated effects of such a scheme based on results from a microsimulation model. Finally, Section VI summarizes the results and offers some concluding observations. II. BACKGROUND The federal PRWORA legislation stipulated that 25 percent of the caseload in a particular state had to be participating in work activities by fiscal year 1997.(1) The minimum work participation requirement has been and will be increasing by 5 percent each year until fiscal year 2002, when it will reach 50 percent. States failing to meet the work participation requirements might not receive the full value of the federal TANF block grant. Since 1997, continued economic prosperity and substantial declines in welfare caseloads have left states with substantial TANF surpluses, and no state thus far has failed to meet the work participation requirements (U.S. Department of Health and Human Services 2000, pp. 41-3).(2) The federal legislation defines an allowable work activity as unsubsidized employment, subsidized private sector or public sector employment, on-the-job training, job-search assistance for up to six weeks, community service programs, vocational education training for up to one year, and education for persons who have not yet completed high school. The legislation emphasizes work activities and places caps on the number of people who can be placed in educational activities. Reducing the caseload can also count toward the participation requirement. States have considerable latitude in penalizing household heads who fail to comply with the work requirements. Benefits can be reduced or terminated, at state discretion. States can exempt certain people from the requirements, such as single parents of young children, but they must meet federal requirements for the percentage of their caseload participating in work activities. …

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