All of the program parameters are for a hypothetical AFDC family of three -- one parent and two children.
Maximum Monthly Benefit
The most commonly used program parameter in past studies is the maximum monthly benefit (MMB). The reasons for this may be that: it is intuitively appealing; the data are easily constructed; MMB varies substantially both across states and over time; and the MMB may be highly correlated with other aspects of the program that determine both eligibility and benefit levels.
We define MMB as the typical maximum AFDC benefit for a three-person family during the quarter plus the value of Food Stamps for a family receiving that benefit, deflated by the regional CPI-U.(9) If a state changes its nominal AFDC payment rate during the quarter, we use the average rate applicable over the three months.
We use several data types and sources to create the MMB variable. ACF provided us with state-level typical maximum monthly payment (MAXPAY) data for a family of three from 1979 through 1994. Quarterly MAXPAY data were not compiled before July 1982; therefore, we estimated quarterly MAXPAY values from 1979.1 to 1982.2 based on historical state fiscal year budgeting patterns.(10) We obtained maximum monthly Food Stamp benefit and standard deduction data by quarter from the Program Reports and Analysis Branch, USDA. The Food Stamp benefit for a three-person family receiving the typical maximum AFDC benefit is equal to the maximum Food Stamp benefit for a three-person family less 30 percent of the difference between MAXPAY and the Food Stamp standard deduction.
For practical reasons, our treatment of other program variables is not symmetric with our treatment of the MMB measure in that we do not assume they are simultaneously determined with participation and average monthly benefits. Instead, we treat them as exogenous, with some risk of reporting findings that are biased estimates of their impact on participation.
Average Tax and Benefit Reduction Rates
The average tax and benefit reduction rate (ATBRR) is the average rate at which disposable income is reduced per each dollar of income, earned or unearned, between zero earnings and the AFDC "earnings cut-off" -- the highest level of gross earnings that a family of three can have and still receive some benefit . Formally:
Equation 4.1: ATBRR = 1 - (Yc - Y0)/Ec,
where Yc is disposable income at the earnings cut-off, Y0 is disposable income at zero earnings, and Ec is the AFDC earnings cut-off. We define disposable income as the sum of earnings, EITC, AFDC benefits, Food Stamp benefits, and less FICA where the AFDC benefit is calculated using the earnings disregard for a family that has received AFDC benefits for more than 12 months. Thus, Y0 is identical to MMB.
ATBRR varies across states as a result of a state's MMB, earnings cutoffs, and other program characteristics. ATBRR also varies over time within states as a result of federal program provisions, most notably OBRA81 and DEFRA84, and changes in the EITC. These latter changes had differential effects across states because of the initial cross-state variation in the variable. This is especially true for OBRA81. We experimented with various lags of ATBRR in the models.(11)
Marginal Tax and Benefit Reduction Rate
The marginal tax and benefit reduction rate (MTBRR) is the rate at which disposable income decreases for each additional dollar of earnings; we calculated the MTBRR for the level of earnings just below the AFDC earnings cut-off. Specifically,
Equation 4.2: MTBRR = 1 - (Yc - Yc-20)/20,
where, Yc is disposable income at the earnings cut-off, and Yc-20 is disposable income at $20 below the AFDC earnings cut-off.(12) Like ATBRR, MTBRR is sensitive to both state and federal program provisions. We experimented with various lags of MTBRR in the models.
Gross Income Limit
Prior to October 1, 1981, there was no federal provision for a gross income limit at which families became ineligible for AFDC benefits. In some states, families with very substantial earnings could obtain AFDC benefits because of income disregards for employment expenses and child care. OBRA81 imposed a limit on the gross income that a family could have and still received any benefit, at 150 percent of the state's need standard; i.e., a family became ineligible for AFDC benefits if its income exceeded 150 percent of the applicable need standard. DEFRA84 raised the gross income limit to 185 percent of a state's need standard.
The practical effect of a federally mandated gross income limit varies across states and is dependent on the level of the gross income limit in relation to the AFDC earnings cut-off. In fact, the gross income limit enacted under OBRA81 exceeded the AFDC earnings cutoff for our hypothetical family in every state. We have assumed very small disregards however -- the monthly standard allowance after twelve months of receiving benefits and no child care.(13) If the same family had substantially greater employment or child care expenses, the gross income limit might have been binding in many states after OBRA81, and in fewer states after DEFRA84. The closer a state's gross income limit is to the AFDC earnings cutoff we have computed, the more likely it is to be binding.
To reflect these considerations, our measure of how binding the gross-income limit is in a state, CUTGIL, is equal to the AFDC earnings cutoff relative to the gross income limit. Prior to 1981.4, CUTGIL is equal to zero in all states because the gross income limit during that period was, implicitly, infinity. The larger this ratio is, the more likely the gross income limit is binding for some potential AFDC families.