Determinants of AFDC Caseload Growth

07/01/1997

A. BACKGROUND AND PURPOSES

In recent years many states have made substantial changes to their Aid to Families with Dependent Children (AFDC) programs on Federal 1115 Waivers, and the recent enactment of the Personal Responsibility and Working Opportunity Reconciliation Act of 1996 ensures that many more, large changes will be implemented in the not too distant future. The anticipated growth in state-level program variation and innovation makes it especially important to improve our understanding of state-level factors behind historical growth in AFDC participation and expenditures. A better understanding will:

  • help states and the federal government prepare for the implications of economic recessions and recoveries under block grants;
  • help states design, and predict the consequences of future program changes; and
  • improve our ability to understand the separate effects of state reforms and environmental factors.

For these reasons, the Office of the Assistant Secretary for Planning and Evaluation (ASPE) in the U.S. Department of Health and Human Services contracted with The Lewin Group, Inc. to develop a state-level econometric model of AFDC participation and expenditures. This is the project's final report.

This study uses "pooled" quarterly time-series data from all 50 states and the District of Columbia for the period from 1979 to 1994. We have developed econometric models for caseloads, the number of recipients, the number of child recipients, and average monthly benefits, with separate equations for the Basic and Unemployed Parent (UP) programs. Explanatory variables in these models include demographic factors, labor market factors, AFDC program factors, and factors related to other programs.

B. KEY FINDINGS

1. The estimated effects of the business cycle on participation are substantial. Based on the estimates, if the unemployment rate rises one percentage point and remains constant for one year, it would increase the Basic caseload by 2.4 percent. Changes in the unemployment rate also have much longer lasting effects on caseload growth than previously estimated in other studies. Our findings indicate that an increase in the unemployment rate for the current quarter could affect caseload growth for the next 14 quarters. Previous studies have not found significant effects after four quarters. We find that a one time increase in the unemployment rate of one percentage point would increase the caseload by nearly six percent after 14 quarters.

The business cycle findings for the UP caseload are large in comparison to those found in almost all previous studies, and also take a very long time to fully materialize. We estimate that a one percentage point increase in the unemployment rate increases the UP caseload by 26 percent after 14 quarters.

2. We find strong evidence of the effects of changes in three important program parameters on participation. We estimate that a ten percent real increase in the maximum monthly benefit for a family of three (e.g., from $400 to $440) increases the Basic caseload by 2.7 percent by the end of that year and the UP caseload by 2.6 percent. We also estimate that a 10 percentage point drop in the average tax and benefit reduction rate -- the average reduction in benefits/increase in taxes per dollar of earnings -- increases the Basic caseload by 1.5 percent, but, somewhat surprisingly, has no impact on the UP caseload. Finally, we estimate that the increase in the gross income limit enacted under the Deficit Reduction Act of 1984, from 150 percent of the state's need standard to 185 percent, increased both the Basic and UP caseloads by a little over one percent.

3. The contribution of growth and aging of the population most at-risk for AFDC participation was high during the early 1980s, but declined throughout the period studied and is now negative. The baby boom generation -- those born in the early 1960s -- were entering the age group at highest risk for AFDC in the early 1980s, while smaller post-boom cohorts were entering that age group by the end of the decade. From 1980 through 1983, we estimate that this factor contributed an average of 2.0 percentage points to annual growth in the Basic caseload. By 1994 the annual contribution was -0.4 point. Results for the UP program were comparable.

4. Legalizations of illegal aliens under the Immigration Reform and Control Act (IRCA) of 1986 appear to have contributed substantially to Basic caseload growth in some states during the period from 1988 to 1993. Even though individuals legalized under IRCA were not eligible for benefits during a five-year waiting period, many of their children were born in the United States and had been eligible all along, but presumably not enrolled because of deportation fears. Hence, there were many "child-only" case openings once parents became legal aliens. We estimate that IRCA legalizations contributed about 1.5 percentage points to growth in the Basic caseload. The contribution of this factor varied substantially across states.

5. Declines in marriage and increases in non-marital births contributed substantially to Basic caseload growth throughout the period examined. These factors account for average annual growth in the Basic caseload of 0.5 percentage points from 1980 to 1994. This may understate the effects of the growing number of single-parent households, which could not be estimated directly because they are not measured accurately at the state level.

6. Many other factors we examined were not found to have statistically significant, substantial estimated effects. We were especially surprised that the Medicaid variables used in the analysis yielded very weak findings, given the strong findings from analysis of micro data that appear in the literature. A search through many possible factors yielded only a few that had statistically significant effects. Any specification search of this sort will turn up a few "significant" variables even if none have real effects, and this makes us cautious about accepting the findings at face value. We are especially concerned that these variables are capturing the effects of other factors that we have not measured. All of these variables were only significant in the Basic models, and in some cases significance was sensitive to specification changes. These variables are discussed in more detail later in the paper.

7. In many years, the changes in the state explanatory variables in the models account for most of the observed changes in participation, but there are important exceptions. The state variables in the model account for only part of the growth during the period from 1985 to 1991, especially. The unaccounted for growth was probably caused by a combination of national program changes and state factors that we did not include in the model.

C. RESEARCH IMPLICATIONS

This study demonstrates both the promise and limitations of the pooled time-series approach to studying not only AFDC caseload participation, but also other state-level measures of program participation and indicators of the welfare of vulnerable populations. This approach may prove to be a useful tool in helping researchers and policymakers determine whether changes in such variables are due to state program changes or to environmental factors that are beyond the control of the states. The promise of this tool will be substantially enhanced if better measures of key state-level factors are developed -- both prospectively, as welfare reform and other changes occur, and retrospectively, as is necessary to estimate and understand the impacts of these factors on the measures of interest.