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BRUCE D. MEYER AND DAN T. ROSENBAUM - page 31 / 52

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THE LABOR SUPPLY OF SINGLE MOTHERS

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To assess the effect of cutting the AFDC benet, one needs to incorporate the effects of all three of the welfare variables and the Medicaid if Work variable. When the AFDC maximum benet and payment standard are cut, they not only reduce benets if one does not work, but also reduce benets if one does work. They also decrease the likelihood that a working mother will be on welfare at all, thereby reducing both her Medicaid eligibility and her AFDC transaction and stigma costs. When we do the full calculations, we nd that a 10 percent cut in the maximum benet ($324 annually) increases both the annual and weekly employment rate by about 1.0 percentage points.

Despite a more detailed calculation of welfare incentives than most past work and the use of panel data techniques, we think there are important potential sources of bias in these esti- mates. We should also note that by dividing the effect of welfare into income when working and when not, and by estimating a separate term for transaction costs/stigma we are putting the theoretical predictions to a more severe test than most work. As discussed in Section IV, the Welfare Benets if Work variable and the Probability of AFDC Receipt if Work variable are more dif- cult to calculate precisely than our other variables. The larger coefcient on the Welfare Benets if Work variable could also be due to the scale of this variable being inappropriately low. The earnings distribution used to calculate expected benets puts most of the weight on earnings levels where welfare benets would be low or zero. It is very likely that we should use an earnings distribution that puts greater weight in the left tail, since women who work while on welfare rarely report all of their earnings to the welfare ofce [Edin and Lein 1997]. The reasons for possible bias in the Probability of AFDC Receipt if Work variable are similar. The coefcients on these two variables tend to both be large in the same specications with their opposite signs canceling each other out.

C. Medicaid

We nd little effect of Medicaid on the employment decisions of single mothers. Theory predicts that the Medicaid if Work variable will have a positive effect on employment. The variable has the opposite effect from this prediction in both samples, although the coefcient estimates are small and usually are not signicantly different from zero. This result is not completely unexpected given the weak and conicting ndings in past work.

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