POLICY BRIEF: Money or Time? Insights on Child Development

In 1996, changes to welfare law memorialized the virtues of paid labor outside the home. The idea was that the dignity of work can uplift families and ensure that they did not become dependent on the government dole for the rest of their lives.

“The Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) in 1996 drastically altered the nature of cash welfare: it introduced federally mandated time limits on welfare participation, imposed work requirements on participants, and gave States legislative freedom to re-allocate funds, design program features, and change benefit formulae,” Mullins wrote.

“The 1990s also saw several large expansions in the EITC (Earned Income Tax Credit, which significantly enhanced the financial returns to work for single mothers.”

A more generous Earned Income Tax Credit was supposed to make up for food stamp allotments and welfare payments that would decline or disappear for heads of families who remained unemployed.

Taxpayers would save money. The needy, cast as the “deserving poor,” would be better off with paychecks. All would be well.

Not so fast.

No simple equation

The tradeoff between welfare and work, however, is no simple equation, Mullins determined in a recent paper, “Designing Cash Transfers in the Presence of Children’s Human Capital Formation.”

Policy makers, whether politicians, bureaucrats or even economists, put a price on changes in cash transfers in the short term – a set budget horizon.

“If we want to project the cost, we have to think about how people are going to respond to a change in incentives. And that's happening in the short run. In terms of, are people going to work more? Are they going to work less? So we're going to be spending more?

“When the focus is on short run cost, I think that does affect the framing,” he said in an interview for the U of M’s Heller-Hurwicz Economics Institute.

Taking the long run educational attainment and life success of a representative nationwide sample of children raised by single mothers, Mullins arrives at a striking conclusion.

“Accordingly, it is not optimal to subsidize their employment,” Mullins concluded. “The optimal schedule is much more generous for those not earning.”

Mullins’ economic model suggests the right answer is far more than single mothers now receive.

“When using the sample in the year 2000 as a benchmark, average net income under the optimal policy is $1,500/month, a number that is 20% higher than under existing policies,” he wrote. “The implications for shape are even more severe. The average welfare participant in the benchmark received $750 per month when not working. In the optimal policy – which is universal – all individuals receive nearly $1,500 per month when not working."

For more than half a century, researchers have assumed that government aid tied to paid work outside the home was the most effective – and least costly – version of a social safety net.

“…This thinking about the long run, thinking about human capital formation, that’s new,” Mullins said in a recent podcast for the Institute for Research on Poverty at the University of Wisconsin–Madison.

“So, for whatever reason, I don’t think it’s found its way into mainstream policy analysis.”

Human Capital Formation

Mullins relied on a sample of 955 single mothers and 1,390 children who’ve been assessed regularly for decades as part of the Panel Study of Income Dynamics (PSID). Many of those offspring are now young adults, with lives that can be measured.

“Okay, so the analysis suggests that if a single mother goes to work at a low paying job, there is a negative effect on the child's cognitive and behavioral skills,” Mullins said. “That's going to show up later in life as lower earnings and a higher propensity for criminal behavior.”

That finding is consistent with a growing body of research into early childhood education that finds children raised by parents who are present – and engaged – do better than their peers from similar disadvantaged backgrounds.

Those outcomes lead to positive economic returns, Mullins found.

“While reversing the welfare reform era does not have a universally statistically significant effect on skill outcomes, the outcomes for all types are positive, and the estimated total net present value effect on skills (per child) amounts to $1,859 in year 2000 USD,” the Mullins paper revealed.

“As was the case for maternal welfare, these aggregate effects conceal considerable heterogeneity across groups of children, with large skill gains applying to a small fraction of the population, moderate skill gains for some, and statistically insignificant skill losses for others.”

Future research directions

Providing a dependable guide for future changes in government aid to single parents will require all manner of additional research, in Mullins’ view.

In addition to the PSID, he would like access to detailed Social Security and Census records, to overcome the limitations of relatively small sample sizes.

The intricacies of family life also can add to the challenges of definitive conclusions on work/life tradeoffs in raising children.

“People become single mothers. People exit the population of single mothers by remarrying, by cohabiting. These are complex processes that we need to understand better, especially to the extent that they may be shaped by the incentives of social programs,” Mullins said.

“That’s something that a lot of people are working on, but we don't yet have clear answers.”

Another caveat that could affect the map for improving the social safety net for singled mothers: Do they have access to affordable, quality childcare?

Mullins acknowledges that an outside caregiver might change the equation for whether a single mother taking a paying job undermines the development of her children.

“One can imagine that that very much depends on the quality of childcare that is available to single mothers, specifically the quality of that care relative to the quality of their own (child) care,” Mullins said. “So that is something that probably varies in the population. …That's important for policy reasons, right?

“Because one could imagine that if we could increase the quality of care that is available to all families, perhaps that would eliminate this money/time tradeoff that I'm describing.”

But he quickly added, “In my opinion, we’re a long way from that.”