Welfare reform and the level and composition of income

Introduction. The Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996 had many goals, not least of which was ending dependence on government benefits through promotion of work. The new welfare program was expected to work in conjunction with the Earned Income Tax Credit (EITC), whose expanded generosity in the early 1990s increased the incentive for low-income families to enter the labor force. A significant body of research was spawned in the wake of welfare reform and EITC expansions, but most of the analyses have relied on data and outcomes prior to 2000 (Grogger and Karoly 2005; Hotz and Scholz 2003), and research on interactions between the macroeconomy and social policy reforms on income levels, as well as on the distribution of income, is scarce (Meyer and Sullivan 2006; Mills, Alwang, and Hazarika 2001; Schoeni and Blank 2000). In this chapter we estimate how welfare reform, the macroeconomy, and the EITC affected the level and composition of income across the distribution of single-mother families. The target of welfare reform was low-income single mothers, as this demographic group historically comprised over 90 percent of the caseload. Although the typical (noncensored) spell on Aid to Families with Dependent Children (AFDC) for single mothers was only about eight months (Blank and Ruggles 1996), the public perception of long-term dependence and intergenerational transmission was widespread and not altogether false from a lifetime perspective (Blank 1997).