Overview of the Final Report of the Seattle-Denver Income Maintenance Experiment. Cash Transfer Effects on Labor Supply

05/01/1983

The labor supply results for husbands, wives, female family heads, and youth will be summarized in turn.  For each group, the overall response to the SIME/DIME negative income tax plans taken together is described first.  A discussion of differences in response among the different NIT plans follows.

As mentioned above, the samples used for the labor supply analysis include families that were eligible for the counseling/training subsidy treatment.  There is no statistically significant evidence that the counseling/training subsidy treatment altered the effect of the negative income tax treatment on labor supply behaviors.  Consequently, the labor supply analysis can statistically separate the effect of the two treatments, and the results described in this section can be interpreted as the effect of just the negative income tax plans on work effort.

The NIT treatment was administered for two different lengths of time (three and five years) to get some information both on how long the family members took to adjust their behavior to the change and on whether a long-term program might have a different effect from a shot-term one.  Obviously the experiment could not go on indefinitely.  The hope was, however, that any differences between the responses of the three- and five-year sample wold help predict long-term program effects.  In addition, interview information was collected for at least one post-experimental year in order to measure any effects of the cessation of benefits.

Husbands

The results for husbands show that the combination of negative income tax plans tested in SIME/DIME — which, as already mentioned, represents on average a relatively generous cash transfer program with a guarantee of 115% of the poverty line and a tax rate of 50% — has a significant negative effect on hours worked per year.  Table 4A shows the findings by experimental year and duration of treatment.  The best measure of the overall labor supply effect for the combination three- and five-year samples is probably the disincentive effect as measured in the second year — after all the experimentals have had time to adjust to the treatment but before the three-year families start preparing for the treatment to end.

This percentage reduction in hours of labor supplied for the three- and five-year families combined, as measured in the second experimental year, is about 9%.  For the three-year sample, the maximum labor supply response is a 7.3% decline, occurring in both the second and third years.  For the five-year sample, the maximum response is a 13.6% decline, occurring in the fourth year of the five-year treatment period.  These maximum percentage responses represent in absolute terms a decline of about 133 and 234 hours of work per year, respectively.

Table 4. Labor Supply Response of Husbands:
A. Overall NIT response
(percentage difference in annual hours worked)

Sample Group  Year
1 2 3 4 5
3-year sample -1.6 -7.3 -7.3 -0.5 -0.2
5-year sample -5.9 -12.2 -13.2 -13.6 -12.3
Total Sample -3.1 -9.0 -9.3

B. Second year response, by NIT plan
(percentage difference in annual hours worked)

  Tax Rate
Guarantee 50 percent 70 percent 70 percent
(declining)
80 percent
(declining)
$3,800 -6.7 -5.6 -10.0 -8.9
$4,000 [$4,800?] -8.8 -1.5 -14.5 -9.9
$5,600 -11.8 -10.4 -8.7
Source:  Derived according to the formula in the Final Report, Volume 1, Part III, Chapter 5, footnote 3 and data in Tables 3.4 and 3.9.

The larger response for husbands enrolled in the five-year group suggests that the response to a long-term national program of comparable generosity might be higher than the response measured by the three-year sample, or even for the combined three- and five-year sample.  It should be noted, however, that no general statement about the effect of treatment duration on response can be made, since this effect depends critically on the generosity (i.e., the guarantee/tax rate combination) of the NIT.

By the end of the first post-treatment year, labor supply for NIT-eligible husbands had again returned essentially to the same level as that for controls, indicating strongly both that the observed response was indeed a result of the treatment and that husbands can adjust their labor supply fairly rapidly to changed incentives.  Average work reductions were observed to be larger among Black and Chicano men than among White men.  However, these results were not statistically significant.  Similarly, work reductions were observed to be larger in Denver (which had a tight labor market during the experiment) than in Seattle (which had high unemployment during most of the experiment).  Again, these results failed to be statistically significant.

When the results for all 11 negative income tax plans are estimated separately, as shown in Table 4B, we begin to see how the pattern of response changes with changes in the negative income tax plan.  As the guarantee becomes more generous, the labor supply response becomes generally more negative.  Response does not, however, change in any clear pattern as the tax rate changes.  This result may at first appear surprising.  However, recall that plans with higher tax rates — and greater associated work disincentives for NIT recipients — also have lower breakeven levels.  Consequently, higher tax plans will have fewer recipients, and a smaller fraction of the population will be affected by their work disincentives.

When the plans are grouped according to relative overall generosity as measured by the breakeven level (not shown), the magnitude of the labor supply reductions for husbands increases as the generosity of the plan increases.  Findings by plan again indicate greater responses for the five-year sample than the three-year sample.  In addition, although the response is uniformly greater for the five-year sample than the three-year sample, the difference between the two is less for the lower than for the higher generosity plans.

What form did the decrease in annual hours worked take?  Was it mainly that people worked with the same regularity but for fewer hours each week, or was it that they spent more time not working at all — that is, unemployed or out of the labor force?  Experimental husbands did work significantly fewer weeks than control husbands:  annual weeks worked were 2.8 less during the second year.  Most of this reduction came about through a significant increase in unemployment.(7)  Weeks unemployed for experimental husbands were on average 2.2 more than for controls.  One interpretation of this result might be that the cash transfer program enabled husbands to take more time to find a better job.  However, other findings from the experiment show that husbands in the experimental group did not find measurably better jobs than their control counterparts, at least as judged by the wage rate.  Disregarding the distinction between unemployment and out of the labor force, a safer conclusion is that NIT eligibility induced men who were out of work to spend more time between jobs than men in the control sample.  For a few men, the time spent out of employment was increased quite considerably.  For example, during the second experimental year the proportion of men in the NIT-eligible group who worked at least one week during the year dropped by 7 percent in comparison to that observed in the control group.  For those experimentals who did work, there was a significant reduction in the proportion who worked full time, but no significant impact on the proportion working overtime or only part time.

A question remains as to whether the missing observations of those who dropped out during the experiment and/or possible misreporting bias cause the estimates presented above to be distorted in any measurable way.  This is, by its very nature, a difficult question to answer.  Examination of other earnings records (particularly from Social Security, but also, on a more fragmentary basis, from the Washington and Colorado Department of Employment Security) on both experimental and control families suggests that for husbands any attrition and misreporting bias is probably small.

Wives

The labor supply response of wives to the SIME/DIME negative income tax treatment was significantly negative and larger in percentage terms than the response of husbands, at least when that response is measured with SIME/DIME interview data.  As shown in Table 5A, the average work reduction for the three- and five-year samples taken together, as measured in the second experimental year, is about 20%.  For the three-year sample the maximum effect was a decrease in annual hours of 16.5% in hours worked, occurring in the second year.  For the five-year sample, the maximum effect was a decrease in annual hours of approximately 27.1%, occurring in the fourth year.  In absolute terms these decreases — just over 100 hours a year and just over 200 hours per year, respectively — are smaller than for husbands.  The larger percentages decreases should be interpreted in the context of the smaller average hourly commitment of these women to market work than the average hourly commitment of their husbands.  Wives readjusted at the end of the experiment as quickly as husbands, with the wives in the three-year sample even showing a tendency to work more then comparable control families during the second post-experiment year.

Table 5. Labor Supply Response of Wives:
A. Overall NIT response
(percentage difference in annual hours worked)

Sample Group  Year
1 2 3 4 5
3-year sample -4.0 -16.5 -15.2 -2.0 +13.4
5-year sample -15.1 -26.5 -21.6 -27.1 -24.0
Total Sample -8.1 -20.1 -17.4

B. Second year response, by NIT plan
(percentage difference in annual hours worked)

  Tax Rate
Guarantee 50 percent 70 percent 70 percent
(declining)
80 percent
(declining)
$3,800 -24.7 -13.2 -1.6 -19.7
$4,800 -29.3 -23.2 -20.7 -18.7
$5,600 -28.1 -40.1 -12.6
Source:  Derived according to the formula in the Final Report, Volume 1, Part III, Chapter 5, footnote 3 and data in Tables 3.5 and 3.9.

When response is estimated separately for the eleven plans tested (see Table 5B), the response for wives, as for husbands, generally increased in magnitude as the guarantee became more generous and, again as for husbands, showed a somewhat inconsistent pattern with respect to the tax rate.  When plans are arrayed by generosity of the breakeven level, wives show the expected pattern of generally increasing response magnitude as generosity increases.  The five-year responses are uniformly, although not significantly, larger than the three-year responses for wives.  The treatment duration differences that do exist are again smaller for less generous NIT plans than for plans with higher breakeven levels.

There are some interesting differences between the behavior of wives and husbands with respect to the form the decrease in work actually took.  Weeks worked per year were about 3.8 less for experimental wives than for control wives in the second experimental year.  Virtually all of this difference took the form of an increase in weeks out of the labor force (rather than weeks unemployed as was the case with husbands).(8)  The probability of working at least one week during the year was also significantly less for experimental wives during the second experimental year.  With respect to changes in the amount worked by those who do work, there was a significant reduction in the probability of both full-time and part-time work.

Analyst have investigated the importance of misreporting and attrition biases on the experimental results for wives.  Employment and earnings checks with the same records used to validate the results for husbands suggest that both the attrition bias and the misreporting bias for wives may be substantially — with both working in the direction of exaggerating observed experimental control differences.  Once again, incomplete date makes it impossible to come up with precise estimates of the magnitude of the biases, though examination of the Social Security and unemployment insurance records suggests that as much as half of the measured response may be attributable to differential attrition bias and that a large fraction of the remaining response may represent misreporting bias.  The reader should therefore be cautioned that the observed labor supply response for wives might overstate the work reduction that actually occurred.

Female Family Heads

As with the previous two groups, female family heads responded to the SIME/DIME negative income tax treatment by reducing work effort significantly.  The overall response of the three-year and five-year samples taken together, as measured in the second treatment year, was 14%.  Their maximum response was larger in absolute and percentage terms than that of either husbands or wives.  For the three-year sample (see Table 6A) the maximum reduction was about 22%, occurring in the final treatment year; for the five-year sample the maximum response was about 32%, also occurring in the final treatment year.  These correspond to absolute reductions of about 220 and 405 hours per year, respectively.  These maximum responses, it should be noted, are about double the average response.

Unlike husbands and wives, female heads do not seem to have responded differently to the three- and five-year treatments, since the responses for the two samples measured over the same period of time are not significantly different.  However, their adaptation both to the experiment and to its end appears to have been slower, suggesting that female heads adjust more slowly to changes in financial incentives than do husbands or wives.  This suggest that the response observable in any brief-duration experiment, such as three or five years duration, will understate the work reduction of female family heads relative to a permanent program.

Table 6. Labor Supply Response of Female Heads:
A. Overall NIT response
(percentage difference in annual hours worked)

Sample Group  Year
1 2 3 4 5
3-year sample -5.5 -14.1 -21.6 -8.9 -7.7
5-year sample -7.9 -15.0 -21.2 -28.3 -31.8
Total Sample -6.3 -14.3 -21.4

B. Second year response, by NIT plan
(percentage difference in annual hours worked)

  Tax Rate
Guarantee 50 percent 70 percent 70 percent
(declining)
80 percent
(declining)
$3,800 -7.0 -19.4 -2.5 -16.0
$4,800 -21.7 -11.7 -20.9 -10.5
$5,600 -6.9 -23.7 -25.1
Source:  Derived according to the formula in the Final Report, Volume 1, Part III, Chapter 5, footnote 3 and data in Tables 3.6 and 3.9.

When the responses are calculated separately for the eleven plans tested (see Table 6B) no obvious pattern of variation between the labor supply response and either guarantee or tax rate is found.

How did the average reduction in annual hours worked manifest itself in patterns of employment for female family heads?  First, as with the other two groups, there was a significant reduction in weeks worked.  For female heads this reduction was higher than for husbands but lower than for wives.  As with wives, but not husbands, this was accounted for by dropping out of the labor force rather than by being unemployed.  The probability of working at all during the year also decreased significantly for female heads — again, the magnitude of the labor force participation decline is between those for husbands and for wives.  With respect to changes in full-time, part-time, or overtime work by those who worked, female heads reacted more like the husbands than the wives.  The only significant change for those that worked was a decrease in full-time work.

With respect to the question of possible misreporting and attrition bias in the observed responses, comparison with other data records suggests that there was no misreporting bias.  There is, however, evidence of moderate attrition bias that goes in the other direction from that observed for wives.  When interpreting the results for female heads, therefore, it should be kept in mind that the observed responses might underestimate slightly the actual reduction.

Youth

Based on their own interview-reported hours and earnings, both male and female youth (at least age 16 but under age 21) appeared to respond to the negative income tax plans tested in SIME/DIME by reducing their labor supply significantly.  For the three- and five-year samples for males taken together, the observed reduction was substantial; reported hours worked per week decreased on average by about 24% and the proportion of the year during which they reported working decreased by about 17%.  Although the proportional reductions in work effort are large for both young men and women, the absolute reductions are quite small, since average work effort among teenagers is low.

When the labor supply response of youth is estimated for the three- and five-year samples separately, the differences between the two are not generally significant.  However, the fact that the observed effects for the five-year sample are larger (and, in the case of young men, sometimes much larger) than for the three-year sample suggests that the work effect of a permanent program might be larger than the observed response in this limited-duration experiment.  Differentiating response by plan yields the same lack of tax rate effect as appeared for the other groups; and for youth there is no systematic guarantee effect either.

Labor supply response does vary in an important respect according to whether the youth remained dependents or set up separate households.  For males who continued to live at home and for males who left their original family to form new, two-parent families (both eligible for continued payment), the observed work disincentive is substantial.  By the second half of the third experimental year, hours worked by the new husbands had declined by about 33% (mainly accounted for by increased unemployment), and the hours worked by those continuing to live at home had declined by about 43% (about equally accounted for by increased unemployment and increased time out of the labor force).  But for young men who left their parental family to live as single individuals, there is no significant work disincentive effect.  For females there is a significant work disincentive (about a 42% decrease in hours worked) only for those who continue to live with their parental family.  For none of the youth groups was the decrease in hours worked accompanied by an increase in time spent in school.  The observed work reductions tend to be largest for those who are not in school, but labor supply declines are not restricted to youths in that group.

Generalizing to the National Population

As emphasized earlier in this overview, the observed labor supply responses represented so far are effects that are specific to the population enrolled in SIME/DIME and relate only to NIT programs actually tested in that experiment.  In order to predict from the observed SIME/DIME responses the effects of national programs of differing generosity, the SIME/DIME analysts developed a more general form of the work disincentive response.

The most noteworthy pattern they found is that, although the decrease in hours worked by participants gets larger the higher the tax rate (holding the guarantee constant), the work disincentive for the U.S. population as a whole gets smaller.  This is because a higher tax rate implies a lower breakeven income level and a smaller number of participants.  The positive labor supply response among those losing eligibility is big enough to offset the larger negative response among the program participants.