The 1993 EITC Expansion and
Low-Skilled Single
Mothers’ Welfare Use Decision
Hau Chyi
WISE, Xiamen University
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Motivation
• Total welfare caseloads decreased to 2.3
million in 1999 from 4.1 million in 1990
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• Previous literature attribute it to the
success of welfare reform during the
1990s
• This paper intends to investigate the
relative effectiveness of the EITC and the
initiatives of the welfare reform
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EITC Expansion since 1993
Source: Hotz and Scholz (2001)
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Modeling Strategy
• Estimate a single mother’s joint probability
of welfare use and work
– General impression is that welfare
participants don’t work. So why is estimating
joint distribution necessary?
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Distribution of Single Mothers’ (monthly) Four States in
NLSY 79
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• The ratio increased since 1993, indicating
policies may have not only decreased
welfare use, but also promoted work
among those who are still on welfare
– Looking at marginal probability alone mask
the compositional change
– Also, estimating joint probability of work and
welfare deals with the simultaneous decisions
issue
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Basic Estimation Framework
• Dependent Variables:
– Welfare (W) and Work (H)
– Four possible states: D
Welfare
Work
No
Yes
D=
No
Yes
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2
3
4
– We want to know how EITC and welfare reform affect
a single mother’s decisions of choosing each state 8
Estimation Strategy
• D-D estimator of the effect of the EITC
program:
– 1993 expansion applies only on families with
more than 2 kids (treatment group)
– Difference between families with one child
and those with more than one is substantial
– Difference in behaviors between families with
2 or more kids and those with one kid is used
to estimate the EITC effect
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Source: Hotz and Scholz (2001)
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Estimation Strategy
• Welfare reform: focus on the five year time
limits
– Use Grogger and Michalopoulos (2003)’s
strategy, families with their youngest children
older than 13 are not bound by this restriction
– Use the exact year and month to construct the
time limit dummy
• Year- and state-fixed effects are also
added to control for the business cycle
and long-run state-specific factors
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The latent variable H* can be defined similarly.
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Assume
• Joint probability distribution can be
estimated by a bivariate probit model.
• Work and welfare decisions are identified
by the effective tax rate of welfare on
earnings
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Data
• National Longitudinal Survey of Youth 1979
(NLSY 79)
– Follows young adults who were between 14 to
23 in 1979 in the U.S.
– It has weekly information of hours of work and
monthly welfare use information since 1978
– Use information from 1985 to 2000
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• Detailed information is crucial in examining
joint decision
– Eligibility of the welfare program is checked
every month
– Annual data, such as March Current
Population Survey (CPS), can make it appear
that work and welfare decisions are made
jointly
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Parallel trend assumption
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(Correlation Coefficient = -.711)
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The Average Effect
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To sum up:
1. the EITC expansion explains roughly about
38% of the welfare-caseload reduction among
this group of mothers in the 1990s.
2. 42% of those who leave welfare due to the
EITC expansion were already working before
the expansion.
3. 37% of the increase in the (no welfare, work)
alternative due to EITC expansion is from
workers leaving welfare.
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Future Studies
• How does welfare reform and EITC
expansion affect single mothers’ offsprings?
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