In 1995, the Cato Institute published a groundbreaking study, The Work vs. WelfareTrade-Off, which estimated the value of the full package of welfare benefits available to a typical recipient in each of the 50 states and the District of Columbia. It found that not only did the value of such benefits greatly exceed the poverty level but, because welfare benefits are tax-free, their dollar value was greater than the amount of take-home income a worker would receive from an entry-level job.
Since then, many welfare programs have undergone significant change, including the 1996 welfare reform legislation that ended the Aid to Families with Dependent Children program and replaced it with the Temporary Assistance to Needy Families program. Accordingly, this paper examines the current welfare system in the same manner as the 1995 paper. Welfare benefits continue to outpace the income that most recipients can expect to earn from an entry-level job, and the balance between welfare and work may actually have grown worse in recent years.
The current welfare system provides such a high level of benefits that it acts as a disincentive for work. Welfare currently pays more than a minimum-wage job in 35 states, even after accounting for the Earned Income Tax Credit, and in 13 states it pays more than $15 per hour. If Congress and state legislatures are serious about reducing welfare dependence and rewarding work, they should consider strengthening welfare work requirements, removing exemptions, and narrowing the definition of work. Moreover, states should consider ways to shrink the gap between the value of welfare and work by reducing current benefit levels and tightening eligibility requirements.
Michael Tanner is a senior fellow, and Charles Hughes is a research assistant, at the Cato Institute.
There is little doubt that one of the most important long-term steps toward avoiding or getting out of poverty is taking a job. Only 2.6 percent of full-time workers are poor, as defined by the Federal Poverty Level (FPL) standard, compared with 23.9 percent of adults who do not work. Even part-time work makes a significant difference; only 15 percent of part-time workers are poor. And while many anti-poverty activists decry low-wage jobs, a minimum-wage job can be a springboard out of poverty.
Moreover, while periods of high unemployment undoubtedly make it harder for individuals to find work, especially low-skilled workers, the relationship between unemployment rates and the number of families on the Temporary Assistance for Needy Families (TANF) welfare program is tenuous at best, as indicated in
Contrary to stereotypes, there is no evidence that people on welfare are lazy or do not wish to work. Indeed, surveys of welfare recipients consistently show their desire for a job. At the same time, however, the evidence suggests that many are reluctant to accept available employment opportunities.
Despite the work requirements included in the 1996 welfare reform, nationwide less than 42 percent of adult welfare recipients are actually working. The actual work participation may be much lower than that. Many recipients credited as working do not have jobs, but are participating in other work activities such as job training or job search. In fact, less than 20 percent of recipients have unsubsidized private-sector jobs.
Many welfare recipients, particularly long-term recipients, lack the skills and attachment to the job market necessary to obtain the types of jobs that pay average or above-average wages. Individuals who do leave welfare for work most often start employment in the service or retail industries, in positions such as clerks, secretaries, cleaning persons, sales help, and waitresses. Although it would be nice to raise the wages of entry-level service workers, government has no ability to do soattempts to mandate wage increases, such as increases in the minimum wage, primarily result in increased unemployment for the lowest-skilled workers.
Unemployment Rate and Enrollment in the Temporary Assistance for NeedyFamilies (TANF) Program
Sources: Bureau of Labor Statistics; Office of Family Assistance.
Therefore, it seems likely that it will continue to be difficult to move individuals from welfare to work as long as the level of welfare benefits makes the choice not to work a rational alternative.
Most reports on welfare focus on only a single program, the cash-benefit program Temporary Assistance for Needy Families (TANF). But this focus leaves a misimpression that welfare benefits are quite low, providing a bare subsistence level of income. In reality, the federal government currently funds 126 separate programs targeted toward low-income people, 72 of which provide either cash or in-kind benefits to individuals. (The remainder fund communitywide programs for low-income neighborhoods, but do not provide benefits directly to individual recipients.) State, county, and municipal governments operate additional welfare programs. Of course, no individual or family receives benefits from all 72 programs, but many recipients do receive aid from a number of the programs at any given time. The total value of welfare received, therefore, is likely to be far higher than simply the level of TANF benefits.
In 1995, the Cato Institute examined the value of the full package of welfare benefits available to a typical recipient in each of the 50 states and the District of Columbia.The Workvs. Welfare Trade-Off found that not only did the value of such benefits greatly exceed the poverty level, but because welfare benefits are tax free, their dollar value was greater than the amount of take-home income a worker would receive from an entry-level job. Since that study was published, however, many welfare programs have undergone significant change, including the 1996 welfare reform legislation that ended the Aid to Families with Dependent Children (AFDC) program and replaced it with TANF.
We have therefore reexamined the issue in light of current benefits. In particular, this study seeks to determine the approximate level of benefits that a typical welfare family, consisting of a single mother with two children, might receive, and to compare those benefits with the wages that a recipient would need to earn in order to take home an equivalent income.
Among our key findings:
In 18 states, the total value of welfare benefits has declined in inflation adjusted terms since 1995. However, this is due to the changing composition of what we included in the package of benefits (largely reflecting a reduction in the number of people on welfare who receive public housing assistance) rather than a real decline in the value of components.
Despite this decline, welfare currently pays more than a minimum wage job in 35 states, even after accounting for the Earned Income Tax Credit.
Because of increases in the Earned Income Tax Credit (EITC) and the creation of the Child Tax Credit (CTC), as well as the adoption of state-level equivalents of the EITC, it is possible for an individual leaving welfare to take a job paying slightly less than welfare without a loss of income in 39 states. However, that difference is small and not likely to offset the value of leisure.
