Determinants of AFDC Caseload Growth. 3. AFDC Program Variables

07/01/1997

Variables reflecting changes in AFDC benefit levels and the implementation of new policies that either affect eligibility or the conditions under which individuals may receive benefits are typically incorporated in models of AFDC caseload growth (Exhibit 2.4).

The AFDC benefit variable is expressed in a variety of ways. It is most commonly expressed as the real dollar value of the maximum benefits for a family of a given size, typically a three person household. In some studies, the value of Food Stamp benefits combined with the AFDC benefit is used instead of the AFDC benefit alone. The combined variable more accurately reflects the benefits to a household that participates in the AFDC program than the AFDC benefit alone because Food Stamp benefits are reduced by 30 cents for each additional dollar of income, including income from AFDC. As a result, Food Stamp benefits are relatively high in states with relatively low AFDC benefit levels. This leads to less variation across states when the combined benefit measure is used than when the AFDC benefit alone is used as the explanatory variable.

A few studies have used measures of AFDC benefit levels that express benefits relative to some measure of earnings, either as a ratio of benefits to earnings, or as the difference between after-tax earnings and AFDC benefits. Incorporating earnings and benefits in this manner imposes a restriction on the independent effects of earnings and benefits on participation. An alternative strategy is to specify the two variables separately and then test the implied restriction. We think this strategy is especially important in a study that seeks to identify causal relationships.

One study treats the AFDC benefit level as an endogenous variable, jointly determined with the rate of recipiency (Shroder, 1995). The logic is that welfare benefits are a public good and their provision is, in part, determined by the preferences of voters (taxpayers). In states with a high proportion of AFDC recipients, AFDC benefits will be lower because the cost of an additional dollar of benefits to taxpayers is higher. An instrumental variable is used for the AFDC benefit level in the recipiency model. This study finds a very large estimated effect for increases in the maximum monthly benefits -- about twice as large as when no instruments are used.

Variables reflecting changes in national AFDC policies over time are also included in a number of models. Examples of these are OBRA81, the Deficit Reduction Act of 1984, and the JOBS program in 1990. In many of the individual state models, variables reflecting state AFDC policy changes are also included. None of the national studies cover the most recent years when a variety of waivers have been granted to states to experiment with their AFDC programs, and therefore do not address these policy changes in their models. Such variables are included in some of the individual state models we reviewed.

Exhibit 2.4

AFDC Program Variables Used in Previous Studies of AFDC Caseload Growth

Variable Type Description Model(s)
AFDC State Share Annual, State Log of difference of one minus federal matching rate Shroder (1995), benefit model
AFDC Benefit Annual, state Log of state's own maximum monthly AFDC grant to a three person household plus Food Stamp benefit dollar value Shroder (1995), recipiency model
  Annual, state Dollar value of maximum monthly AFDC benefit for a family of four in 1977 dollars, divided by 100 Moffitt (1986)
  Quarterly, national Maximum AFDC Benefit for a family of three, expressed in 1991 dollars; weighted average of state benefits CBO (1993)
  Quarterly, state Real maximum AFDC payment level Cromwell et al. (1986)
  Monthly, state Real value of average annual AFDC cash grant to a family of three Oregon
  Monthly, state Combined real cash value of monthly AFDC, Food Stamp, and Medicaid benefits for the average three person AFDC family Texas
Net Gain Index Monthly, state Real difference between after tax earnings (Wages + EITC + Food Stamps - FICA) received by female workers in female dominated industries and benefits paid to a three person AFDC family (maximum monthly AFDC benefit + the maximum monthly Food Stamp grant + average monthly Medicare expenditure); values lagged 12 months in recovery model and 6 months in recession model Maryland, Balance of state AFDC-Basic model, excludes Prince George's County
Grant-Earnings Ratio Monthly, state Ratio of three person grant to typical earnings in non-manufacturing employment Washington, AFDC-Basic exit
AFDC-Basic Need Standard Quarterly, state Real AFDC-Basic need standard for a family of three taken at the midpoint of quarter Garasky (1990)
State's "Composite Neighbor's" AFDC Benefit Annual, state Log of state's "composite neighbor's" maximum monthly AFDC grant to a three person household plus Food Stamp benefit dollar value Shroder (1995), recipiency model
Benefit Reduction Rate Annual, state Percent reduction in benefits for each additional dollar of earnings Moffitt (1986)
OBRA81 Immediate Effect Quarterly, national Dummy equals one in 1981.4 and zero in all other quarters Grossman (1985); CBO (1993)
  Quarterly, state Dummy equal to one in 1981.4 and zero in all other quarters Barnow (1988)
OBRA81Phase-In Effect Quarterly, national Dummy equals one in 1982.1 and zero in all other quarters Grossman (1985); CBO (1993)
  Quarterly, state Dummy equal to one in 1982.1 and zero in all other quarters Barnow (1988)

Exhibit 2.4 (Continued)

AFDC Program Variables Used in Previous Studies of AFDC Caseload Growth

Variable Type Description Model(s)
OBRA81 Permanent Effect Quarterly, national Dummy equals one in 1982.2 and all subsequent quarters. Dummy equals zero in all quarters before 1982.2 Grossman (1985)
  Quarterly, national Dummy equals one in 1981.4 and all subsequent quarters. Dummy equals zero in all quarters before 1981.4 CBO (1993)
  Quarterly, state Dummy equal to one in quarter when state adopted OBRA81 standard of need rule and all subsequent quarters Grossman (1985)
  Quarterly, state Dummy equal to one in 1981.4 and all subsequent quarters Barnow (1988)
  Quarterly, state Dummy equal to one in 1981.3 through 1982 Cromwell et al. (1986)
AFDC Kids 18-21 Option Dummy Quarterly, state Dummy equal to one if state has AFDC Kids 18-21 option Cromwell et al. (1986)
AFDC-UP Dummy Quarterly, state Dummy equal to one if state has an AFDC-UP program Cromwell et al. (1986)
Deficit Reduction Act of 1984 Quarterly, state Dummy equal to one in 1984.1 and all subsequent quarters Barnow (1988)
AFDC Policy Dummy Quarterly, state Dummy equal to one from 1987.4 to 1992.4 to represent various state policy changes Florida (Legislative model)
JOBS Implementation Effect Dummy Monthly, state Dummy equal to one in 1990.4 Texas
FIP or FSA Variable Monthly, state Percentage of state operating under Washington's Family Independence Program (1988) or federal Family Support Act (1990) Washington, all models
Lagged AFDC-UP Caseload Index Monthly, state Lagged one month Maryland, AFDC-UP model
AFDC-Basic Case Closure Rate Monthly, state   Maryland, AFDC-Basic model
Workfare Dummy Monthly, state Dummy representing the effect of a new workfare program providing transitional benefits Kansas