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Does Work Pay? An Analysis of the Work Incentives under TANF

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Document date: July 01, 1998
Released online: July 01, 1998

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).


Executive Summary

For years, policymakers have struggled to find ways to make a paycheck more attractive than a welfare check while still ensuring that poor children do not suffer from serious material deprivation. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) represents the most recent attempt to encourage families to leave welfare and go to work. The legislation made several important modifications to existing laws to achieve this goal. First, it transformed cash assistance to the able-bodied poor from an entitlement to a block grant and imposed lifetime limits on the number of months a family could receive cash aid. Second, it gave states wide-ranging authority to require welfare recipients to participate in work-related activities and to impose sanctions for noncompliance, change benefit levels, and change the way benefits are reduced as families attempt to work themselves off welfare. This report examines how state policy choices and current federal laws affect the incentives a family of three faces as it attempts to move from welfare to work in 12 states.1

The basic analysis describes how the income of a single parent with two children changes as she moves from not working to working at a part-time job at minimum wage, then to full-time work at minimum wage, and finally to a full-time job paying $9/hour. In calculating income, we consider the family's earnings, its Temporary Assistance for Needy Families (TANF) grant, the cash value of food stamps it receives, federal and state earned income tax credits, any other state tax credits, and all federal and state tax liabilities.2 In subsequent analyses, we consider the impact of other public assistance programs such as federal housing assistance, child care subsidies, and Medicaid on work incentives. We then explore how lifetime time limits may affect a family's work-welfare decisions. While we focus on the incentives of welfare recipients to go to work, we also examine how the differential treatment of participants and applicants in benefit determination may affect the decisions of low-income workers to leave work and go on welfare.

Our major findings are as follows:

As a family moves from no work to part-time work at minimum wage, its total income grows dramatically.

Across the 12 states we examine, a family of three's income would increase by 51 percent, on average, if the single parent began working 20 hours a week at a job paying $5.15/hour. There is considerable variation across states: in Washington state, a family of three moving from welfare with no earnings to part-time, minimum wage work would enjoy a 38 percent increase in income; in Mississippi, the family's income would rise by 108 percent.

As a family moves from part-time work to full-time work at minimum wage, its total income grows by 20 percent, on average.

Across the 12 states, a 75 percent increase in work effort from 20 to 35 hours a week leads to a 20 percent increase in income, on average, for a family of three. The impact ranges from a low of 16 percent in Michigan to a high of 37 percent in Texas.

As a family moves from full-time work at minimum wage to full-time work at $9/hour, its total income grows by 16 percent, on average.

Across the 12 states, a 75 percent increase in wage rate from $5.15 to $9.00 per hour leads to a 16 percent increase in income, on average, for a family of three. The impact ranges from a low of 4 percent in California to a high of 22 percent in Mississippi.

The federal Earned Income Tax Credit (EITC) is responsible for a considerable portion of the increase in income as families move from welfare to full-time minimum wage work.

Without federal and state EITC programs, a Mississippi family of three that moved from no work to part-time work at minimum wage would receive a 67 percent increase in income; when EITC is included, the increase is 108 percent. Without federal and state EITC programs, a New York family of three that moved from no work to part-time work at minimum wage would receive only a 19 percent increase in income; when EITC is included, the increase is 45 percent.

Federal housing assistance can also affect work incentives, but only 20 percent of families on cash assistance receive housing aid.

When we incorporate the value of federal housing assistance into our income package, we find that in the average state, the income of a family of three would rise by 30 percent if the family moved from no work to part-time minimum wage work. In the absence of housing assistance, moving from no work to work would make the family's income rise by 54 percent.

In the absence of subsidies, the cost of child care could serve as a significant deterrent to work.

If a Colorado single mother on TANF with two children had to pay child care costs for just one child when she began a part-time minimum wage job, her net income would rise by 32 percent, compared with 54 percent if she had no child care costs. However, because child care subsidies are pegged closely to costs and because copayment requirements are modest, subsidies for child care should offset the work disincentives generated by child care costs. If parents are concerned about the quality of child care that is available, even generous subsidies may not help remove the work disincentive presented by the need for child care. Further, if the costs that parents face are considerably higher than those estimated by the state or if statutory subsidies are not available, child care may remain a serious obstacle for women trying to leave welfare for work.

Research has shown that the loss of Medicaid benefits upon leaving AFDC was a significant deterrent to leaving welfare. The decoupling of Medicaid eligibility from the receipt of cash aid and recent expansions of Medicaid eligibility should mitigate the program's work disincentives at lower income levels.

Families leaving TANF for work can receive Transitional Medicaid Assistance (TMA) for at least one year, albeit with some reduction in services and possibly with some premium copayments. Further, children in low-income families, and even some parents, may be eligible for Medicaid either through expansions for children or because they qualify for benefits under the medically needy program. Since families actually do not lose Medicaid benefits when they move from TANF to work, at least in the short run, Medicaid should not hinder the movement of families from welfare to work. However, there is some evidence that low-income families and family service organizations do not understand Medicaid eligibility rules. Thus, even though, statutorily, Medicaid should not interfere with a TANF recipient's decision to work, TANF recipients may fear losing health benefits under Medicaid and choose not to work.

Lifetime time limits on the receipt of TANF benefits provide an incentive to leave welfare for work; the magnitude of the effect, however, is entirely dependent on TANF recipients' views of the future.

Because of the lifetime time limit, receiving TANF benefits this month means potentially forfeiting a month of benefits in the future. Thus, a family deciding whether to receive TANF or work this month must consider the possibility that they may need TANF in the future. To the extent that families worry about the future and believe they will need TANF benefits in the future, time limits could serve as a strong incentive to move from welfare to work. To the extent that families are not "future oriented" and believe they will either not need TANF in the future or be exempt from the time limit, time limits will have little impact on the incentive to move from welfare to work.

The differential treatment of TANF recipients and TANF applicants leads to considerable inequities in some states.

In some states, a family trying to work its way off TANF may receive TANF benefits even if its income exceeds the eligibility limit for a family applying for benefits. For example, in Massachusetts, a single mother with two children earning $655 a month would not be eligible for TANF; however, if she had been receiving TANF benefits and then began working and earned $655 a month, she would receive $297 in TANF benefits. Thus, the differential treatment of recipients and applicants may induce low-income non-TANF working families to stop working in order to qualify for benefits.

Notes from this section

1. The 12 states are Alabama, California, Colorado, Florida, Massachusetts, Michigan, Minnesota, Mississippi, New Jersey, New York, Texas, and Washington. These 12 states contain a large portion of the nation's population, including about half of all Aid to Families with Dependent Children (AFDC) recipients. They represent a broad range with respect to geography, fiscal capacity, citizen needs, and traditions of providing government services. Focusing on these states presents us with a fairly general, albeit incomplete, picture of the work incentives facing TANF recipients.

2. Information on state TANF plans is drawn from Jerome Gallagher, Megan Gallagher, Kevin Perese, Susan Schreiber, and Keith Watson (1998) and reflects program rules as of October 1997. All federal and state programs and tax rules are as of 1997.


Note: This report is available in its entirety in the Portable Document Format (PDF).



Topics/Tags: | Economy/Taxes | Families and Parenting | Poverty, Assets and Safety Net


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