The Next Step on Welfare Reform

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August 22 marked the fifth anniversary of President Clinton signing landmark welfare reform into law. While other attempts at reform resulted in only cosmetic changes, the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) has had a meaningful and lasting impact on welfare policy. In many respects, it has been successful. But the level of benefits that welfare recipients receive is still an important crux for reform.

The PRWORA differed greatly from prior reform bills because it gave states a great deal of responsibility for both structuring and implementing welfare reform. Therefore, it should come as no surprise that some states have enjoyed more success than others in moving people from welfare to work. Between August 1996 and June 2000, Idaho reduced its welfare caseloads by 94 percent. Conversely, Rhode Island reduced its caseload by a paltry 21 percent over the same time‐​span. As welfare policy analysts consider the future of welfare reform, important lessons can be drawn from the experiences of different states.

For instance, one of the most important policy changes the current reform introduced is the threat of benefit sanctioning. States have varied in the amount of power that they have given caseworkers to sanction the benefits of welfare recipients who refuse to comply with work activities. Not surprisingly, states with the strongest sanctioning provisions have enjoyed the most success in reducing their welfare caseloads during the past five years. These include Florida, Oklahoma, and Wisconsin, each of which has reduced their welfare caseloads by at least 75 percent.

However, there has been little debate about the overall level of benefits that welfare recipients receive. This is unfortunate because there is accumulating evidence that the level of benefits is playing a large role in caseload fluctuations. In his groundbreaking book Losing Ground, Charles Murray convincingly argues that increases in welfare benefits during the Great Society fostered greater dependence on welfare. Prior to the Great Society, when total welfare benefits were beneath the minimum wage, an unmarried pregnant woman had one of three options. She could get married, give her child up for adoption, or obtain employment and fend for herself. Going on welfare for an extended period of time was not a viable option.

However, during the Great Society, when welfare benefits exceeded the minimum wage the scenario changed. Collecting welfare suddenly became economically advantageous for many women. Not surprisingly this lead to increases in both welfare caseloads and the number of single parent families.

Since the Great Society the amount of welfare benefits has remained relatively high in most states. A 1995 Cato Institute study found that in each of the 50 states the total amount of benefits available to individuals receiving welfare exceeded the amount that could be earned by working full‐​time at a minimum wage job. The Fraser Institute is currently conducting a similar study on current levels of welfare benefits. Their preliminary findings indicate that welfare still pays more than a minimum wage job in most, if not all, states.

Indeed, it seems likely that in some states, high levels of welfare benefits are serving as an impediment to reform. A regression analysis on state welfare caseloads supports this point. Holding constant the sanctioning power of caseworkers and a host of economic variables, states whose benefits were consistently low during the past 5 years did a better job reducing their caseloads than states whose benefits were consistently high.

Additionally, states that enacted reductions in welfare benefits between 1995 and 2000 have enjoyed more success in reducing their caseloads. These findings are statistically significant. Overall, the regression model predicts that a state that lowered its benefit levels by $1,000 between 1995 and 2000 would reduce its welfare caseload by an additional 2.6 percentage points.

The level of benefits available to welfare recipients merits greater discussion in current public policy debates. Increases in benefits resulted in increasing welfare caseloads during the Great Society. Likewise evidence indicates that high benefits in some states are currently preventing further caseload reductions. Congress would do well to remember this when welfare reform comes up for reauthorization in 2002.

Michael J. New

Michael New is a research assistant and a data analyst for the Cato Institute’s Center for Representative Government.