Some Evidence on Race, Welfare Reform, and Household Income

In 1996, federal welfare-reform legislation eliminated Aid to Families with Dependent Children (AFDC) and replaced it with Temporary Assistance for Needy Families (TANF). Numerous studies have estimated impacts of reform on welfare caseloads, employment, earnings, family structure, income, and poverty. Two principal challenges to identifying TANF’s impact have been discussed in the literature. First, factors other than welfare reform should have increased household income. It is well known that reform occurred during a period of strong economic performance. While the unemployment rate for blacks fell to the lowest level ever recorded, wages for low-skill groups rose for the first time since the 1970’s. Further, other policy changes in the second half of the 1990’s focused on improving the economic status of the disadvantaged. Examples include expansions in the Earned Income Tax Credit (EITC), minimum wages, and public health insurance (Medicaid and the Children’s Health Insurance Program). Second, TANF was implemented in all states over just 16 months (between September 1996 and January 1998), leaving only limited scope for identifying impacts of TANF through timing across states. While these challenges are well known, their implications for interpreting estimated TANF impacts in nonexperimental studies are not. In this paper, we do four things. First, we discuss the identification of TANF effects in a prototypical nonexperimental model. We show that if TANF effects are the same in every year, then the lack of time variation in TANF implementation is not problematic. However, if TANF and trend effects are allowed to vary over time in an unrestricted fashion, then TANF effects for later years are unidentified. Second, we propose a method for bounding impacts in light of this identification problem. Third, we apply this method to analyze the impact of TANF on household income for a sample of children in the Current Population Survey (CPS) covering calendar years 1988–1999. Fourth, we document significant heterogeneity in the association between household income and both TANF and residual factors across white, Hispanic, and black children.