Determinants of AFDC Caseload Growth. 2. Unemployed Parent Caseload

07/01/1997

1979.4 - 1983.3 Subperiod

Much of the UP caseload growth came in the first four years of the sample period, in which the average annual growth rate was just over 25 percent (middle section of Exhibit 6.1). The model accounts for just under half of that growth. As with the Basic caseload, growth accounted for by the model during this period is the result of offsetting factors. We estimate that the recession contributed 15.3 percentage points to annual growth, that population growth and aging contributed 1.7 percentage points, and that cuts in benefits reduced average growth by 4.9 percentage points. The last of these figures is almost identical to the corresponding figure for the Basic caseload: -4.6 points.

The exceptionally high growth of the UP caseload relative to predicted growth during this subperiod is a puzzle. We are not aware of any major factors that would account for such rapid expansion other than the double-dip recession. It may be that the estimated effects of labor market factors, although large, substantially understate the recession's impact.

1983.4 - 1989.3 Subperiod

During this period the UP caseload declined at an average annual rate of 7.9 percentage points, but the model predicts an even larger decline, of 15.4 percent. The model's prediction stems from the estimated impact of growth in the economy, -16.6 percentage points, offset by a 1.2 percentage point increase attributed to population growth and aging, and an 0.6 percentage point increase attributed to AFDC benefit expansions.

Exhibit 6.2

Actual and Predicted Caseloads, 1979.4 - 1994.3*

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* The predicted caseload series in each graph is normalized to equal the actual series in 1989.4. That is, we use 1989.4 as the base quarter and predict forward and backward from that point. The highest of the "labor market" series above the 1989.4 caseload shows the contribution of labor market factors relative to their contribution in 1989.4. A similar interprediction applies to the IRCA-86 series

1989.4 - 1993.3 Subperiod

During this period the UP caseload again increased very rapidly, an average of 13.1 percent per year. The model predicts growth of 13.0 percent per year -- a surprisingly accurate prediction given the model's performance in the previous nine years. Predicted growth is primarily due to labor market factors (12.8 percentage points), augmented by 0.7 percentage points from population growth and aging and offset by -0.4 percentage points from AFDC benefit changes. Curiously, the estimated effects of AFDC benefit changes on the UP and Basic caseloads during this period and the last year of the full period are opposite in sign. We discuss this further below

1993.4 - 1994.3 Subperiod

There is essentially no growth in the actual UP caseload during the last year of the sample, although the model predicts negative growth of 1.7 percent. The prediction is a combination of negative contributions from three factors; population growth and aging of (-0.3 percentage points), economic recovery (-0.3 percentage points), and changes in the AFDC benefit variables (- 1.1 percentage points).

The large reduction attributed to the AFDC benefit variables is in sharp contrast to the positive 1.3 percentage points that we estimate these same factors contributed to Basic caseload growth during the same year. The reason for this difference is differences in the coefficients of the average tax and benefit reduction rate in the two models. We estimate essentially no long-run effect for the UP caseload, and a negative effect for the Basic caseload. The long-run finding for UP is, however, the result of substantial offsetting coefficients on the ATBRR variable in the first two quarters of the change. The timing of the EITC change is such that the model's predictions for this subperiod reflect the current quarter effect, but not the second quarter effect.

Full Period Findings

In the 19 states with UP programs, the UP caseload grew at an average annual rate of 7.0 percent over the full period, while the predicted caseload grew at an average rate of 0.9 percent. The divergence between the actual and predicted series differs in timing from that for the corresponding Basic series (Exhibit 6.2). Most of the divergence for the Basic series occurs between 1984 and 1991. The greatest divergence for the UP series occurs in the first two years of the sample, through 1981. The actual series continues to grow at a rate that is above that for the predicted series through 1989, but from 1990 on the series move roughly in parallel.