A duration analysis of time-limited welfare

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) replaced Aid for Families with Dependent (AFDC) with Temporary Assistance for Needy Families (TANF). We analyze AFDC and TANF spells using an intertemporal labor-leisure lifetime utility model in which the representative welfare recipient optimally chooses spell length after determining consumption and leisure demands on and off welfare. AFDC eligible individuals were allocated one month of AFDC benefits each month whether or not they were participating in an AFDC spell. TANF eligible individuals are allocated 60 months of TANF benefits that deplete at known rates: -1 on TANF or 0 off TANF. We explicitly solve the TANF TVC for optimal spell length. Our results show that there are four types of individuals: one-timers, cyclers, long-termers, and short-termers. We use these "types" to account for unobserved heterogeneity.; Using state administrative data, we examine the effects of welfare reform on spells in Washington State. Nonparametric and accelerated time failure models are estimated to examine determinants of spells. The AFDC-only hazard was low and constant. The overlap hazard increased slightly in duration at an increasing rate. The TANF-only hazard exhibited a significant amount of positive duration dependence. Our results show that welfare recipients are making smooth transitions into the labor market by gaining work experience and job skills while simultaneously receiving TANF benefits. When the state economy expands, jobs opportunities are more plentiful, recipients are more likely to find jobs. Because WorkFirst requires labor force participation, higher economic growth rates were associated with longer TANF spells, which contradicts the estimated association between economic growth and AFDC spells. Individuals that struggled to leave the AFDC rolls become self sufficient under TANF because they are required to work and are subjected to a time limit. They exit when they accumulate the necessary skill set, for some this takes longer. If they are unable to accumulate the skills necessary to become self sufficient, the state may exempt them from the federal limit under the 20 percent exemption provision. Thus, WorkFirst has been successful at reducing dependency while simultaneously providing a flexible safety net.