As described previously, the model has six participation equations, three for each program (Basic and UP) and one quarterly average monthly benefit equation for the combined programs. The explanatory variables are classified into four broad groups:
Demographic Factors--We distinguish between two types of demographic factors:
- Size and age distribution of the adult population--we assume that these factors are influenced little by economic factors except through immigration or over very long periods of time. This is clearly true at the national level; changes in a state's economy may trigger changes in these factors, but we assume that current migration induced by current economic change is negligible;
- Family characteristics--the variables used to capture family characteristics are vital statistics (marriages, divorces, and out-of-wedlock births) and immigration measures.
- Labor Market Factors, including the unemployment rate and various measures of employment and wages;
- AFDC program factors, including the program parameters, federal legislation, and state waivers. The program parameter variables partly reflect the Food Stamp program, the EITC, and payroll taxes because these interact with the AFDC program rules to determine the relationship between recipient earnings and net income;
- Other program factors and legislation, including Medicaid, SSI, SSDI unemployment insurance, general assistance, paternity identification laws, child support enforcement, and restrictions on abortions and public funding of abortions.
Most other studies have assumed that the second set of demographic variables, family characteristics, are exogenous to AFDC participation. For the reasons given in the previous section, this assumption may be incorrect. Therefore, we investigate the extent to which this assumption is appropriate in a limited way, by estimating models with and without variables intended to capture the effects of changes in these family characteristics.
A schematic summary of the model appears in Exhibit 1.3
Exhibit 1.3: The Structure of the Model