Econometrica: Mar 1996, Volume 64, Issue 2

Welfare Transfers in Two-Parent Families: Labor Supply and Welfare Participation Under AFDC-UP

https://doi.org/0012-9682(199603)64:2<295:WTITFL>2.0.CO;2-K
p. 295-332

Hilary Williamson Hoynes

This paper examines the effect of cash transfers and food stamp benefits on family labor supply and welfare participation among two-parent families. The Aid to Families with Dependent Children--Unemployed Parent Program has provided cash benefits to two-parent households since 1961. Despite recent expansions, little is known about the program's effect on labor supply and welfare participation. I develop a model of family labor supply in which hours of work for the husband and wife are chosen to maximize family utility subject to a family budget constraint accounting for AFDC-UP benefits and other tax and transfer programs. The husband's and wife's labor supply decisions are restricted to no work, part-time work, and full-time work. Maximum likelihood techniques are used to estimate parameters of the underlying hours of work and welfare participation equations. The estimates are used to determine the magnitude of the work disincentive effects of the AFDC-UP program, and to simulate the effects of changes in AFDC-UP benefit and eligibility rules on family labor supply and welfare participation. The results suggest that labor supply and welfare participation among two-parent families are highly responsive to changes in the benefit structure under the AFDC-UP program.

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