Spending on Social Welfare Programs in Rich and Poor States. Final Report.. 3. Cyclical Models

07/01/2004

To confirm that the effects estimated for the unemployment per capita variable were truly state labor market effects and to get a better sense of how spending changed in response to unemployment changes alone, we estimated simple linear relationships between spending per capita in each category and the state unemployment rate with and without per capita personal income as an additional explanatory variable. In the regressions of per capita spending on the state unemployment rate alone (but including state effect dummies) for all states, as shown in Exhibit III-12, spending for cash assistance and public hospitals was positively related to unemployment, in other words an anti-cyclical effect,28 but spending on Medicaid and other social welfare was negatively related to unemployment, a pro-cyclical effect.

Exhibit III-12.
Coefficient Estimates Showing Impact of State Unemployment Rate Without Year Dummies
Variable Overall
CA M NSS PH NSWS
Adjusted R-Squared 0.83 0.83 0.56 0.76 0.68 0.85 0.86 0.87 0.84 0.95
Constant 22.23**
(4.46)
57.91**
(7.10)
158.15**
(14.15)
-178.30**
(12.95)
161.04**
(18.85)
-120.92**
(12.54)
241.19**
(49.31)
305.19**
(39.40)
5577.77**
(45.42)
937.94**
(8.45)
State Unemployment Rate 3.07**
(8.29)
1.66**
(3.70)
-11.34**
(13.67)
2.03**
(2.69)
-10.70**
(16.87)
0.51
(0.96)
3.66**
(10.07)
1.11**
(2.62)
-156.62**
(17.17)
27.86**
(4.57)
Per Capita Personal Income   -0.00**
(5.49)
  0.01**
(30.68)
  0.01**
(36.72)
  -0.00**
(10.37)
  0.17**
(52.47)
Q means Quartiles
CA means Cash Assistance, M means Medicaid, NSS means Non-health Social Services, PH means Public Hospital, NSWS means Non-social Welfare.
T-statistics are in parentheses.
** Significant at the 1% level.
* Significant at the 5% level.

To see how much of the effect of unemployment was operating through the per capita personal income variable, we included per capita personal income in the regression. These results can be seen also in Exhibit III-12. Over all states, the unemployment rate exerted a positive effect on spending for all categories of social welfare spending, and the effect was statistically significant for all categories except non-health social services. Thus, the presence of the per capita personal income variable has eliminated the negative effect for Medicaid and non-health social services spending observed in the regression on the unemployment rate alone. The fact that unemployment and personal income are negatively correlated suggests the negative effects observed in Exhibit III-12 are due to the absence of a control for income. Across all states, then, unemployment seems to do an effective job of picking up positive need effects on spending, except for other non-health social welfare, with personal income held constant. This finding is generally consistent with the results reported in Exhibit III-10 with other explanatory factors (e.g., poverty, population density, federal grants, and year dummy variables) in addition to personal income included in the regression.

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