Report: Explaining the Decline in Welfare Receipt, 1993-1996
EXPLAINING THE DECLINE IN
WELFARE RECEIPT, 1993-1996
May 9, 1997
A Report by the
Council of Economic Advisers
EXPLAINING THE DECLINE IN
WELFARE RECEIPT, 1993-1996
During the first four years of the Clinton Administration, from
January 1993 to January 1997, the number of individuals receiving welfare
fell by 20 percent, or 2.75 million recipients the largest decline in
over 50 years. Three potential explanations for this decline are (1)
economic growth, which created 12 million new jobs over the period, (2)
Federal waivers, which allowed 43 states to experiment with innovative
ideas to help reduce welfare dependency, and (3) other policies
affecting work-related incentives, including the 1990 and 1993
expansions of the Earned Income Tax Credit (EITC) and the recent rise in
federal and state spending on child care. It is important to
determine the causes of this decline in light of the recently enacted
welfare reform legislation. If economic growth was the major
contributor, then continued growth seems essential for further
progress in moving people from welfare to work. If federal policies
played a significant role, however, then continued efforts along these
lines are likely to lead to additional reductions. A
statistical analysis (described in the companion technical paper to this
report) shows that over 40 percent of the decline resulted from a falling
unemployment rate associated with the economic expansion and almost
one-third from statewide welfare reform waivers (Figure 1). Other factors
(which might include other policy initiatives, such as the EITC) account
for the remainder.
Reasons for the
Decline in Welfare
WELFARE CASELOADS AND THE BUSINESS CYCLE
Welfare caseloads tend to fluctuate over the business cycle, rising
when the economy moves into recession and declining once a recovery is
underway and the economy is expanding. For example, the proportion of
the population receiving welfare fell during the expansion of the late
1970s and rose as the economy went into recession in 1980 (Figure 2).
Between 1989 and 1993, the proportion of the population receiving welfare
shot up 25 percent, reaching its highest level ever.
The recession of 1990-1991 and the weak labor market through 1992
certainly contributed to this increase, hindering the efforts of those
welfare recipients seeking work. One might be tempted to
argue that the subsequent decline between 1993 and 1996 simply reflected
the normal return to work of welfare recipients who were unable to find
jobs when the economy was weak.
The business cycle alone, however, is unlikely to account for the
entire decline in welfare recipiency after 1993. The 1990-1991 recession
was relatively mild; the annual unemployment rate
peaked at 7.5 percent in 1992, much lower than the peak rates in the
1974-75 and 1981-82 recessions. It seems improbable that a moderate
recession would lead to such severe swings in the
rate of welfare receipt. Moreover, some states with large reductions in
their unemployment rate during this period did not experience big drops
in their welfare caseload, while other states saw a big
drop in welfare receipt even though their unemployment decline was
moderate (see attached map). For that reason it is important to look at
other factors, including the possible impact of changes in
welfare programs during that time.
FEDERAL WELFARE WAIVERS
Aid to Families with Dependent Children (AFDC) was the Nation's
primary welfare program until last year. The AFDC program was
administered by the states, subject to Federal requirements.
Since 1962, the Secretary of Health and Human Services has had the
authority to waive some of these requirements if states proposed
experimental or pilot programmatic changes that furthered the
goals of the AFDC program. The Bush Administration was the first to use
this authority extensively, especially in its final year. But the
Clinton Administration expanded the number of waivers
dramatically after 1993, granting waivers to a total of 43 states.
Waivers granted to states to implement experimental welfare
policies generally contained a number of provisions that varied greatly
in scope. Some were pilot programs that could not have
had much effect on the size of a state's overall welfare caseload.
Others covered a larger share of the state's welfare population but
included some relatively minor provisions that probably had little
effect on the number of welfare recipients statewide. Six broad
categories of waivers that potentially might have had an observable
effect in reducing state welfare caseloads are:
Termination time limits. States receiving this type of
waiver are allowed to limit the length of time recipients can collect
benefits. Once that limit is reached, benefits are terminated.
Work-requirement time limits. These waivers are similar to
termination time limits, but once the limit is reached, recipients are
required to accept work or enter a training program in exchange for their
Reduced JOBS exemptions. The Job Opportunities and Basic
Skills (JOBS) training program, enacted in 1988, required a share of the
welfare caseload to participate in work and/or training programs.
Waivers were granted to some states to reduce the number of recipients
who were exempt from participating in the program.
Increased JOBS sanctions. Some states argued that sanctions
for recipients who refused to participate in JOBS were inadequate and
requested the ability to strengthen those
sanctions including termination of benefits in some cases.
Family cap. Welfare benefits are scaled to family size and
normally increase when a recipient has an additional child. Some states
requested waivers to eliminate the additional benefit for women who had a
child while receiving welfare.
Increased earnings disregard. For many recipients, a
dollar in earnings led to almost a dollar reduction in their welfare
benefit, providing a disincentive to work. Some states requested
waivers to increase the amount of earnings that welfare recipients could
The number of states with statewide waivers of these types rose
dramatically between 1993 and 1996 (Figure 3). Some states that
experienced large drops in welfare receipt are also states that received
waivers (see attached map).
THE STATISTICAL ANALYSIS
Several factors besides economic conditions and waivers are likely
to affect the rate of welfare receipt. An increase in female-headed
families will tend to increase this rate because the welfare system
strongly favors single mothers with children. The
generosity of welfare benefits also may affect the number of poor
individuals who seek benefits. Labor market returns for less-skilled
workers, national changes in welfare policy, and cultural attitudes
towards welfare receipt, also may play a role. The task of a
statistical analysis is to disentangle the separate effects of these
factors in order to identify the relationship between each of them and
The exercise reported here uses state-level data from 1976 through
1996 to estimate the contributions of economic growth (measured by the
change in the unemployment rate) and approved state waivers to the recent
decline in welfare receipt. The use of state level data
allows us to control for changes that affect welfare receipt across the
entire country at a point in time, such as national changes in welfare
policy. The relationship between, say, economic conditions and the rate
of welfare receipt can still be identified because recessions tend to be
worse in some parts of the country than in others and could lead to
differences across states in patterns of welfare receipt. Using data
over several years allows us to control for long-run differences in
welfare receipt that exist across states. The relationship between
waivers and welfare receipt, for example, can be observed by following
changes in welfare receipt within a state before and after the waiver.
Using techniques like these, a statistical analysis can
estimate the effects of economic activity and waivers on the size of the
welfare rolls holding other things that affect welfare receipt constant.
Figure 4 presents a comparison of Florida and Georgia that is
intended to provide some intuition for the statistical methodology and
the manner in which the effects of economic activity are estimated
separately from other potential confounding factors. It should not be
considered a rigorous test. The figure plots the difference between the
two states in unemployment rates between 1984 and 1996 and in the share
of the population receiving AFDC over the same period. Taking the
difference between the two states in each year controls for any
differences that affect both states simultaneously.
Because neither state received a waiver until late in the 1996 fiscal
year, the difference in trends through virtually all of this time period
are unaffected by differences in waiver provisions or their effectiveness.
Throughout most of the expansion of the middle to late 1980s,
unemployment in Georgia had been somewhat higher than in Florida. When
the 1990-91 recession hit, unemployment in Florida rose considerably
relative to that in Georgia, and the difference has been slow to
recede. Subsequently, AFDC receipt shows an increase in Florida
relative to Georgia. The full statistical analysis uses this sort of
approach to identify the effects of both waivers and economic activity on
the rate of welfare receipt in all states over time.
The Timing of the Welfare Caseload Response
A number of other tests were conducted to explore more complicated
relationships between economic activity, waivers, and the welfare
caseload, particularly the possibility that
impacts on the rate of welfare receipt might not be contemporaneous with
changes in unemployment or implementation of waivers:
Delayed responses. Changes in unemployment may affect the
welfare caseload only after a delay. For instance, the onset of a
recession may lead those low-income workers who lose their jobs to spend
some time looking for a new one while drawing down their limited assets
before applying for welfare. When a recession ends, these typically
less-skilled workers may be the last ones hired.
Advance responses. Waiver policies may have some effect on
the welfare caseload even before the waiver is actually approved. This
effect could occur if publicity regarding the new proposed policies led
potential welfare recipients to seek work more intensively than they
might have otherwise or because they chose not to apply for benefits,
perhaps concerned that they would be treated more harshly by welfare
The results of this analysis indicate a strong relationship between
the welfare caseload and both economic activity and Federal welfare
Changes in the welfare caseload do appear to respond to changes in
the unemployment rate with a delay.
States that instituted a major, statewide waiver did experience a
decline in the welfare caseload in advance of the actual waiver approval.
Waivers that included strengthened JOBS sanctions were related to a
decline in the rate of welfare receipt that did not precede the waiver
Overall, over 40 percent of the decline in welfare receipt between
1993 and 1996 can be attributed to economic growth, almost one-third was
related to federal welfare waivers, and the remainder was due to other,
These findings say nothing about the outcomes for those individuals
who otherwise would have collected benefits had waivers not been
granted. Additional research that can determine how individuals fared
under the alternative waiver provisions, rather than an aggregate
analysis examining the statewide caseload, clearly is desirable to help
address this issue.