A good understanding of labor supply reactions to tax and transfer policies is necessary for achieving related policy goals. Income support programs intend to alleviate poverty and create a more equitable society. However, the reaction of the labor supply can derail the intended results and need to be carefully evaluated for effective policy. Economic theory suggests that as taxes and transfer payments increase, the amount of hours and/or number of employees will decrease (Borjas 2005). The exception is transfer payments with work requirements, where the labor supply moves in the same direction as benefits. In the labor market, individuals have two basic choices: how many hours to work (intensive), and whether or not to work at all (extensive). If the labor supply has largely intensive reactions, certain types of programs, such as food stamps, are most effective, when EITC type programs are more effective for extensive reactions. Government tax and transfer policies affect the labor supply because when the real wage changes the labor supply reacts. This paper will look at the response of the U.S. labor supply to changes in taxes and transfer payments. It will determine if the response is concentrated towards intensive or extensive margins and observe the direction and magnitude of the changes. Understanding labor supply responses is crucial for governments desiring to reach intended policy goals.
Labor market behavior can have significant long run effects on potential output. According to the Congressional Budget Office, the size and quality of the labor force, capital stock, and the efficiency of production, determine a country’s potential output. When policies influence relevant factors, such as the size of the labor force, the...
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...e to participate at a paid wage lower than they would typically require. More people working expands the tax base while reducing the amount of transferred income. The government is able to collect more revenue and still provide a guaranteed income level. (Dickert et al.1995; Browning 1995). EITC type programs can help the government achieve its objectives with minimal negative effects to the economy.
Not all labor markets have identical sizes or types of responses to government decisions. The direction and magnitude of each response will inform policy makers about optimal decisions. Section II of this paper reviews the empirical literature on tax and transfer policies and the labor market. Section III discusses the methodology. Section IV summarizes the results of this study. Section V presents the conclusion as well as identifies areas for further research.
Great discoveries always begin with great questions. Barbara Ehrenreich asked two great questions, “how does anyone live on the wages available to the unskilled” and “how were the roughly four million women about to be booted into the labor market by welfare reform, going to make it on $6 to $7 an hour” (2001, p. 12). To answer the questions, Ehrenreich embarked upon a journey to discover for herself, whether she could match income to expense as a low-wage worker. In effect, Ehrenreich tested the fundamental premise of The Personal Responsibility and Work Opportunity Reconciliation Act, also known as welfare reform, in order to determine whether those individuals formerly on welfare and largely unskilled, could earn a living wage on the minimum wage.
In the terms of the amount of money spent by the national government, the growth of social welfare activities was the most significant policy change in the role of government takes money from taxpayers or borrows it and disburses cash or in-kind benefits, such as food stamps, to millions of people who qualify because of old age, disability, unemployment, or poverty. (Turner et al. 469)
Sheffield, Rachel, and T. Elliot Gaiser. "Food Stamps Don't Stimulate Economic Growth." The Foundry Conservative Policy News from the Heritage Foundation. N.p., n.d. Web. 31 Mar. 2014.
The prospect of the welfare state in America appears to be bleak and almost useless for many citizens who live below the poverty line. Katz’s description of the welfare state as a system that is “partly public, partly private, partly mixed; incomplete and still not universal; defeating its own objectives” whereas has demonstrates how it has become this way by outlining the history of the welfare state which is shown that it has been produced in layers. The recent outcomes that Katz writes about is the Clinton reform in 1996 where benefits are limited to a period of two years and no one is allowed to collect for more than five years in their lifetime unless they are exempted. A person may only receive an exemption on the grounds of hardship in which states are limited to granting a maximum of 20% of the recipient population. The logic behind this drastic measure was to ensure that recipients would not become dependent upon relief and would encourage them to seek out any form of employment as quickly as possible. State officials have laid claim to this innovation as a strategy that would “save millions of children from poverty.” However, state officials predict otherwise such as an increase in homelessness, a flooding of low-waged workers in the labour market, and decreased purchasing power which means less income from tax collections. The outcomes of this reform appear to be bleak for many Americans who reside below the poverty line. How does a wealthy country like America have such weak welfare system? Drawing upon Katz, I argue that the development of the semi-welfare state is a result of the state taking measures to ensure that the people do not perceive relief as a right and to avoid exploiting the shortfalls of capitalism ...
Personal Responsibility and Work Opportunity Reconciliation Act of 1996 fundamentally changed the cash welfare system in the United States. It cancelled Aid to Families with Dependent Children (AFDC) plan, replacing it with Temporary Assistance for Needy Families (TANF). It abolished the entitlement status of welfare, provided states with strong incentives to impose time limits, and tied funding levels to the states’ success in moving welfare recipients into work. It is well known that caseloads plummeted during the 1990s and that employment rates of single mothers--the primary recipients of welfare in the United States—rose almost as fast (Shipler).
"Macroeconomics/Employment and Unemployment." Macroeconomics/Employment and Unemployment - Wikibooks, Open Books for an Open World. N.p., n.d. Web. 04 July 2017.
...r over six-teen years. In this journal entry addressed to her peers and other economists, she examines the Social Security Act’s absent proposals such as Employment Assurance and other work relief programs, none of which made it to the Social Security Act. The journal covers the work relief programs of the 1930s and determines that they can provide suggestions for progressive alternatives to current proposals of today, which could help regain control of the welfare reform agenda.
Albelda, Randy. “Fallacies of Welfare-to-Work Policies”. Annals of the American Academy of Political and Social Science. Vol. 577, JSTOR Sept. 2001. 66-78.
There have been numerous debates within the last decade over what needs to be done about welfare and what is the best welfare reform plan. In the mid-1990s the TANF, Temporary Assistance for Needy Families, Act was proposed under the Clinton administration. This plan was not received well since it had put a five year lifetime limit on receiving welfare and did not supply the necessary accommodations to help people in poverty follow this guideline. Under the impression that people could easily have found a job and worked their way out of poverty in five years, the plan was passed in 1996 and people in poverty were immediately forced to start looking for jobs. When the TANF Act was up for renewal earlier this year, the Bush administration carefully looked at what the TANF Act had done for the poverty stricken. Bush realized that, in his opinion, the plan had been successful and should stay in effect with some minor tweaking. Bush proposed a similar plan which kept the five year welfare restriction in place but did raise the budgeted amount of money to be placed towards childcare and food stamps. Both the TANF Act and Bush's revised bill have caused a huge controversy between liberal and conservative activists. The liberals feel that it is cruel to put people in a situation where they can no longer receive help from the government since so many people can not simply go out and get a job and work their way out of poverty. They feel if finding a job was that easy, most people would have already worked their way out of poverty. The conservatives feel that the plans, such as the TANF Act, are a surefire way to lower poverty levels and unemployment rates as well as decrease the amount o...
Blau, J. (2004). The dynamics of social welfare policy. New York, NY: Oxford University Press, Inc.
Moffitt, Robert. "Incentive effects of the US welfare system: A review." Journal of Economic Literature 30.1 (1992): 1-61.
Schwarz, J. E. (1990). WELFARE LIBERALISM, SOCIAL POLICY, AND POVERTY IN AMERICA. Policy Studies Review, 10(1), 127-139.
One might believe that work requirements do little work for those under the poverty line. Others may believe they increase the chance of job opportunity. Many experts believe that work-capability can work or prepare in exchange for receiving government benefits. The welfare law requires cash assistance to participate in work activities, for extending similar work requirements to other public programs. However, one who supports the view that work requirements are highly effected can be explained later on in this paper. For example; most recipients with significant obstacles to employment never found work even after participating in work programs that were otherwise successful. Over the long term, the successful programs support efforts to boost the education and skills of work requirements, rather than simply requiring them to search for work or find a job. Many of those who argued that work requirement in the Temporary Assistance for Needy Families (TANF) have been a major success for mandatory programs conducted either before the creation or during the early years. I believe that many individuals are unlikely to find jobs on their own and have the most to gain from the employment assistance that TANF was supposed to provide. Work requirements rest on the assumption that disadvantaged individuals will work only if they are forced to do so. Despite the efforts that many poor individuals and families put into working
Government policy environment – a desire to reduce unemployment and make the economy attractive to inward investment as a source of employment and long-term growth
In a recap, the three policies introduced, the Unemployment Reformation Act of 2059, the Infinite Education Opportunities Program Act, and the Unity Tax, will be a vital part in restoring and surpassing expectations for decreasing the percentage of Americans unemployed by ten to fifteen percent within the next six to eight months. I believe that with these policies the chances of a recession will not occur for a long period of time. For that matter, a recession may not occur again depending on how successful the unemployment plans develop. Nevertheless, I predict that by the year 2109 the employment rate for Americans will reach eighty-three to eighty-five percent.