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BRUCE D. MEYER AND DAN T. ROSENBAUM - page 14 / 52

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1076

QUARTERLY JOURNAL OF ECONOMICS

because nearly 90 percent of AFDC recipients also received Food Stamps [U. S. House of Representatives 1996]. The AFDC pro- gram provided cash payments to families with children who have been deprived of support due to the absence or unemployment of a parent. The Food Stamp program provides low-income house- holds with coupons to purchase food. AFDC program parameters were set by the states, while most Food Stamp parameters are the same in all states. Nevertheless, because of the interaction of the eligibility and benet calculations of the two programs, there are interstate differences in the Food Stamps received for people in similar situations. Both of these programs are large relative to other means-tested programs, with 1996 AFDC and Food Stamp expenditures totaling $23.7 billion and $25.5 billion, respectively. Both had growing expenditures and caseloads in the late 1980s and early 1990s, with peaks in scal year 1994.

While much past work has summarized the AFDC and Food Stamp programs using the combined maximum benet, this mea- sure ignores the large interstate differences and changes over time in earnings exemptions and implicit tax rates. By 1996

  • fteen states had exemptions and tax rates that differed from the

standard $120 earnings exemption and the two-thirds implicit tax rate. We summarize AFDC and Food Stamps with three variables implied by our theoretical model: the maximum com- bined benet, expected benets if a person works, and the prob- ability of AFDC receipt (which captures transaction costs or stigma). Due to cuts in AFDC, the mean maximum combined AFDC and Food Stamp benet fell about 7 percent over the sample period. Over the same period mean benets for a working single mother remained roughly constant as implicit tax rates were reduced.

Theory predicts that the AFDC and Food Stamp programs decrease labor supply for two reasons. First, the income effect of the guarantee amount (maximum benet) should make employ- ment less likely and reduce hours worked if a woman works. Second, the implicit tax rate resulting from reductions in benets as earnings increase (captured by reductions in the benets if work variable) also reduces the incentive to work. Thus, AFDC should decrease both the likelihood of working and hours condi- tional on working. However, in interpreting our estimates below, one should bear in mind that substantial research indicates that actual exemptions and implicit tax rates differ from the statutory

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