Labor force and welfare program participation: the effects of welfare - includes related article on public welfare systems

American Journal of Economics and Sociology, The,  April, 1997  by Howard J. Gensler,  W. David Walls

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The estimated correlation between the error terms affecting the labor and welfare participation decisions is -0.506. The null hypothesis that the random errors between the labor force and welfare program participation equations are uncorrelated is strongly rejected: the t-statistic on the correlation coefficient is -50.(13) Thus, it is appropriate to reject the two individual probit equations in favor of the bivariate equation. In light of this finding, we only report the parameter estimates obtained from the statistically superior bivariate equation.(14)

The estimation results for welfare program participation were very precise and all of the parameters with a behavioral interpretation were statistically significant at the one percent level. The findings indicate that, ceteris paribus, blacks are more likely to participate in the welfare system than non-blacks, and households with a child under six years of age are also more likely to participate in a welfare program. As small children require greater care and supervision, the pressure for a single mother to stay home and collect welfare rather than work is greater where there is a small child present. Increases in unearned income decrease the probability of welfare program participation, while increases in the expected guarantee level increase the probability of participation. The effective welfare tax rates on earned and unearned income both decrease the probability of welfare program participation.

In the labor participation equation, all independent variables with a behavioral interpretation were significant at the five percent level.(15) Education and education squared both had a positive impact upon the probability of labor force participation, indicating that for low-income female household heads the marginal effect of education on the decision to work rises with the level of education. Experience had a positive impact upon labor force participation, while experience squared had a negative impact; this indicates that the marginal effect of experience on the decision to work decreases with the level of experience. Other things equal, blacks were less likely to work, as were households with a child under six years of age. Increased levels of both unearned income and the welfare guarantee reduced the probability of working. Any source of alternative income diminishes the incentive to earn income. Increases in the effective welfare tax rate on earned income had a negative effect on the probability of working. An increase in the earned income tax rate reduces the effective wage thereby decreasing the incentive to work. Increases in the tax rate on unearned income had a positive effect on working. Increases in the effective tax rate on unearned income - the rate at which welfare benefits are reduced as unearned non-welfare income rises - reduce non-labor sources of income. These reductions are then supplemented through increased participation in the labor force to compensate for the decline in total family income.