Determinants of AFDC Caseload Growth. F. FURTHER DISCUSSION OF PROGRAM PARAMETER EFFECTS

07/01/1997

In this section we compare our findings for the program parameters to findings from other studies. As with comparisons of business cycle effects across studies, these comparisons are problematic because of specification differences.

Our estimates of the effects of an increase in the maximum monthly benefit are among the highest found, but one study reports a much larger effect (Exhibit 5.10). We estimate that a one percent increase in this variable increases the Basic caseload by 2.7 percent and the UP caseload by 2.6 percent.(17) Our estimates for the Basic program are larger than those reported by Moffit (1986) or CBO (1993), but Shroder (1995) finds a much larger effect than we do for the combined programs: a 16.7 percent caseload increase. Shroder also uses a pooled state time-series methodology, but with several important differences. One major difference is that he uses instruments for the maximum monthly benefit variable, on the grounds that growth in recipients is likely to cause states to reduce benefit levels. When he does not use the instruments, the estimated effect drops by more than two thirds, to 5.1 percent -- still almost twice as large as our own.

Exhibit 5.10

    Sample Percent Change in Participation b
Study Type Period Basic UP Total
Ten Percent Increase in Maximum Monthly Benefit
CBO (1993)f national time-series quarterly 1973-91 0.7% 4.4% 0.8%
Shroder (1995) e pooled state time-series annual 1982-88 n.a. n.a. 16.7%
Moffit (1986) d pooled state time-series biennial 1967-83 1.6% n.a. n.a.
Cromwell et. al. (1986) pooled state time-series quarterly 1976-82 n.a. n.a. 1.3%
Lewin a pooled state time-series quarterly 1979-94 2.7% 2.6% 2.7%
Ten Percentage Point Decrease in Average Tax and Benefit Reduction Rate
Moffit (1986) d pooled state time-series biennial 1967-83 5.5% n.a. n.a.
Lewin a pooled state time-series quarterly 1979-94 1.5% 0.0% 1.4%
Increase in Gross Income limit for 150% to 195% to Need Standard c
Lewin a pooled state time-series quarterly 1979-94 1.3% 1.2% 1.3%

a Basic model includes vital statistics variables; see Exhibit 5.1. Total estimates assume 95 percent of caseloads is in the Basic program.

b Estimate changes may be complete only after several quarters.

c Assumes need standard is identical to AFDC earnings cut off. The change in the gross income limit described is the change that was implemented under DEFRA84.

d Results reported are for random effects estimator. Results for fixed state effects estimator are smaller in magnitude and not statistically significant. Means for the middle year of the sample period (1975) were used in the calculations.

e Based on fixed effects specification with instrumental variables for the maximum monthly benefit variable. Estimate without instruments is about one-third as large.

f Changes calculated at sample means.

We found only one other study that includes an average tax and benefit reduction rate in the specification, Moffitt (1986). Moffit estimates that a 10 percentage point increase in the rate reduces participation in the Basic program by 5.5 percent, compared to our finding of 1.5 percent.

While the reasons that we obtain a smaller effect for the MMB than Shroder and a smaller effect for the ATBRR than Moffitt are unclear, one possible explanation is that we include three benefit variables in our model compared to one for Shroder (MMB) and two for Moffitt (MMB and ATBRR). Neither study, nor any other we have seen, has included a variable for the gross income limit. The sample periods used by both Shroder and Moffitt include years when the GIL changed (twice in Shroder's sample), and it could be that their coefficients for other program parameters are biased away from zero because of this omission. We have not, however, tried to confirm this conjecture.(18)