Accounting for the decline in AFDC caseloads: Welfare reform or the economy?

We use state-level monthly panel data to assess the relative contributions of the macroeconomy and welfare reform in accounting for the 1993-96 decline in Aid to Families with Dependent Children (AFDC) caseloads. Our results suggest that the decline in per capita AFDC caseloads is attributable largely to the economic conditions in states and not to waivers from federal welfare policies. Nationwide, we attribute 66 percent of the decline to the macroeconomy. However, we do find substantial heterogeneity in the impact and timing of alternative waivers on AFDC caseloads. States with waivers impacting parental responsibilities experienced greater caseload declines than states with waivers that made work more attractive. Overall, our model predicts that had it not been for the influence of economic factors, welfare reform would not have led to any decrease in aggregate caseloads.