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TANF and the Labor Market. How the TANF effects single mothers. the distribution of financial aid and its reduction rate
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Handout: A NOTE on TANF and LABOR SUPPLY [References: chapters 2 (2.2 and 2.4) and 17 (17.2) in Gruber’s text]
1. Labor Market: Firms demand labor, Individual supply labor. Compensation for labor includes wage, salary, bonus, and other benefits. For simplicity, we use wage (W) as “compensation” for providing labor service or “price” of labor. 2. Questions of interest: a) Does TANF benefits increase or decrease the labor supply of single parents (mothers)? b) What is the impact of reduction in TANF benefits on social efficiency (output, income) and social welfare (equity)? 3. Program Background - TANF – Temporary Assistance for Needy Families - Created in 1996, to replace AFDC (Aid to Families with Dependent Children Program) - Program was intended to provide benefits for a limited period of time (i.e., “Temporary”) 4. Program description: (1) TANF provides monthly support check to families (single mother or two parents) with incomes below a threshold level set by each state. (2) Eligibility: Income level below a threshold (3) Benefit guarantee : The cash welfare benefit for individuals with no other income. It may be reduced as income increases. Example of guaranteed benefits: can vary widely from $204/month to $1,464/month (Alaska); NY and NJ – single mother with two children and no other source of income receive: $424 monthly check; (4) Funding of program: Jointly funded by federal government (through support in form of block grants to finance state program) and the states (5) Benefit reduction rate: the rate at which welfare benefits are reduced per dollar of other income earned (50 – 100%) (6) Federal government mandates: max of 60 months (5 years) over the course of life receiving TANF Welfare recipient is required to work after receiving at most 24 months of TANF benefit (States can choose shorter deadlines.) Some exceptions (“loopholes”): “hardship” and definition of “work” (job-skills training as work, etc.) ©2019 Charles R. Sebuharara pg. 1
5. Some Implications of TANF for labor market, efficiency and welfare (7) By working more hours: a recipient of TANF can earn more money for food, etc.; but, there is a cost to work: Less time spent with children or own leisure If leisure is a normal good, and recipient prefers more time at home to time at work => more work makes recipient worse-off, but it allows him/her to buy more food. (8) Question: How does the TANF recipient decide about optimal amount of labor to supply? Use Utility maximization framework – choice between FOOD and LEISURE 6. EXAMPLE 1: Total hours available/year (T = 2000 hours), N = hours worked, L = hours spent on leisure; Wage rate (w) = $10/hour; TANF benefit (B) = $5,000, guaranteed; TANF benefit reduction rate (r) = 50% (i.e., TANF is reduced by $0.50 for each $1 of earnings); Assume TANF recipient works 90 hours/year; Questions: (1) How many hours the recipient spend on leisure? (2) What is the price of leisure when the benefit reduction rate is 50%? (3) What is the total amount the recipient can earn before her TANF benefit stops? (4) What is the recipient’s total earnings (earned income)? (5) What is the recipient’s total income (or consumption, if she consumes all income)? ©2019 Charles R. Sebuharara pg. 2