Wisconsin - Madison IRP Discussion Papers

This paper examines implications drawn from labor supply literature for the design of a transfer program for female-headed families when the youngest child turns six years old. It is found that if the average level of support to households remains cons tant, a "safety-net" view of the system would lead to raising the tax rate dramatically while only moderately increasing the guarantee. In contrast if the transfer system is viewed as attempting to maximize the well-being of households, the optimal policy is to leave the structure unchanged as the child turns six. However, if public opinion led one also to decrease the average support to households as the child turns six, the "safety-net" view would result in adoption of a structure of high tax rates, whereas the Utilitarian view would result in drastic cuts in the guarantee with only modest increases in the tax rate. Labor Supply, Economic Well-Being, and the Structure of the Transfer System Historically, the potential welfare has been separated into two distinct groups: those individuals who are expected to work in order to provide for their primary support, and those who are not expected to work and can look toward the government for support.! The composition of these two groups Ims changed over time but, broadly speaking, those who would be expected to work and provide for themselves include able-bodied married couples with and without children, single individuals, and female household heads whose youngest child is over six years old. The aged, disabled, and women heading households in which the youngest child is under six can be classified as those who are not expected to support themselves. While it is of considerable policy interest to examine the economic justification and implications of dividing the female-headed household population into these two groups on the basis of the age of the youngest child, this paper takes that division as given. Our paper examines the question of how one would structure a transfer program for the group of single mothers who are not expected to work, and how that program would compare to one designed for single mothers who are expected to work. We examine in particular the empirical literature bearing on the question of how the choice of guarantees and benefit reduction rates in transfer programs would change as the household moves from the not-expected-to-work category to the expected-to-work category. The hypothetical context of our study is as follows. The government has chosen to implement a transfer system for female-headed households in