A New Idea for Welfare Reform

Abstract

This article analyzes several proposals to build work incentives into the U.S. welfare system. It concludes that the most cost effective way to do that is to offer a work subsidy to all low-income single parents—in other words, to simply pay them for working in the labor market. This conclusion is based on a model of the labor force participation behavior of low-income single mothers that the author developed with Robert Moffitt. Among the proposals evaluated in the article, besides the work subsidy, are proposals to reduce the rate that welfare benefits are reduced when welfare recipients work, to provide wage subsidies to low-wage workers, to expand the earned income tax credit, and to subsidize the fixed costs of working. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Welfare reform is now a top priority on the U.S. agenda. 1 A broad consensus has emerged that the current welfare system discourages the very type of behavior it should encourage:

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