Welfare Reform and the Level and Composition of Income

Abstract: We use data from the Current Population Survey to estimate the effects of welfare reform, the business cycle, and the EITC on the level and composition of income and earnings across the distribution of single mothers with dependent children. We admit multiple sources of heterogeneity in policy responses across skill levels and business cycle conditions, and estimate models both at the mean of the income and earnings distributions as well as at several quantiles. Our results show that TANF raised disposable incomes an average of eight percent among higher skilled mothers, and raised earnings among low skilled mothers in the lower half of the distribution by as much as 20 percent, but that it also resulted in a significant equal-size loss of after-tax total income among the low-skilled. Strong local economies accommodated welfare waivers in the mid 1990s that fostered income and earnings gains among the less skilled. The EITC expansions of the 1990s boosted before-tax earnings across the earnings distribution, especially for the low skilled in the bottom half of the distribution, but also resulted in significant losses of total income for the low skilled. The earnings gains among the low skilled a decade after the implementation of TANF and expansions of the EITC have been more than offset by losses in transfer income and have left the most vulnerable single mothers either running in place or falling behind