Consumption , Income , and Material Well - Being After Welfare

This paper investigates how material well-being has changed over time for those at the bottom of the distributions of income and consumption. We document the sharp differences between recent trends in measured income and consumption, focusing on families headed by a single mother. Since the early 1990s, income in the bottom decile has fallen by nearly 30 percent, while income has risen by more than 15 percent for the fourth and fifth deciles. The trends for consumption, on the other hand, show neither a sharp decline at low percentiles nor a large increase at higher percentiles. These patterns are evident in two income and two consumption data sources. We then examine several explanations for these differences. We argue that it is unlikely that reported income provides a consistent measuring stick in recent years due to large changes in both the sources of income and the reporting rates of the main income sources for single mothers during this period. Accounting for changes in the characteristics of single mothers can reconcile most of the income consumption difference above the bottom decile. For the bottom decile, simulations accounting for transfer under-reporting can account for much of the reported income decline. Finally, we consider how these trends translate into changes in well-being by investigating changes in disaggregated consumption and time use. Increases in spending on housing account for much of the increase in consumption in the bottom quintile, while increases in transportation spending account for much of the rise in the second quintile. Two datasets indicate modest improvement in housing quality, but the evidence is less strong at the very bottom. Although expenditures on food away from home and child care also rise, these categories are small, on average. The consumption of non-market time for those in the bottom half of the consumption distribution falls sharply indicating a loss in utility for those families if non-market time is valued above $3/hour. Evidence from time-use surveys suggests that the lost non-market time reflects a shift away from shopping, food production, and housework. *We would like to thank Caroline Hoxby, Erik Hurst, Kara Kane and seminar participants at the Fundacion Ramon Areces, Universitat Pompeu Fabra, the University of California, Berkeley, the University of Virginia, the Institute for Research on Poverty at the University of Wisconsin, Madison, Harvard University, the NBER Summer Institute, the University of Chicago, the University of Notre Dame, Indiana University-Purdue University Indianapolis, and Queen’s University. We would also like to thank the Annie E. Casey Foundation for generous support and Vladimir Sokolov and Anjali Oza for excellent research assistance. Meyer: Harris School of Public Policy Studies, University of Chicago, 1155 E. 60 Street, Chicago, IL 60637 [email protected] Sullivan: University of Notre Dame, Department of Economics and Econometrics, 447 Flanner Hall, Notre Dame, IN 46556 [email protected] See Cutler and Katz (1991), Slesnick (1993), Triest (1998), and Jencks, Mayer and Swingle (2004a,b). See Cutler and Katz (1991), Johnson and Smeeding (1998), Blundell and Preston (1998), Krueger and Perri (forthcoming), Attanasio, Battistin and Ichimura (2004), Autor, Katz, and Kearney (2004), and Mayer and Jencks (1993). See Blank (2002) and Grogger and Karoly (2005) for reviews of this literature. See Moffitt (2001, 2003) for background and methods. Daniel Patrick Moynihan predicted that the welfare reform would lead to “children sleeping on grates, picked up in the morning frozen...” Our analyses, which focus on material well-being, do not constitute an overall evaluation of welfare reform because these reforms included other explicit goals which we do not directly address such as ending dependence on government benefits and promoting work, marriage, and two-parent families.