Work incentives and the Food Stamp Program☆

A central question in public finance, one that has generated decades of research, is how tax and transfer programs affect labor supply. The early literature typically estimated cross sectional models thereby ignoring the endogeneity of net wages, net income, and selection into transfer programs. Concerns about biases from these cross sectional approaches led to methodological innovations, in particular structural modeling in the presence of kinked budget constraints.¹ Structural approaches had their own limitations, including concerns about sensitivity to choice of utility function, stochastic assumptions, and so on. The “new public finance” approach followed, with a reliance on using policy-induced variation and quasi-experimental methods to analyze impacts on labor supply. Quasi-experimental approaches have been used to analyze the impact of wide range of policies on labor supply such as federal taxes, the Earned Income Tax Credit, Medicaid, social security, and welfare reform.

Our paper contributes to the literature on taxes, transfers and labor supply by using a quasi-experimental approach to estimate the impact of the Food Stamp Program (FSP) on labor supply. The FSP is a federal means-tested program, providing benefits to buy food for families who are income and asset eligible. Importantly, while the primary goal of the Food Stamp Program is to increase food consumption, Hoynes and Schanzenbach (2009) show that most households are inframarginal and thus food stamp benefits can be treated as an income transfer.

Food stamp benefits are the fundamental safety net in the U.S., being the only public assistance program that is available to all family types (most programs are targeted on female-headed households, children, or the elderly). In fact, food stamps is the largest U.S. cash or near-cash means-tested transfer program with spending in 2009 of 50 billion dollars compared to 30 billion for TANF and 40 billion for the federal EITC.² The importance of the FSP program is particularly apparent in the current great recession, where more than 1 in 9 persons is receiving food stamps.

A central challenge for the empirical food stamp literature is that the program is federal and exhibits no variation across states, which is an approach commonly used in the quasi-experimental literature.³ Further, the universal nature of the program means there are no ineligible groups to serve as controls, which is another common approach in the quasi-experimental literature. Instead, the typical food stamp study in some way compares recipients to nonrecipients leading to a possible bias if there is selection into program participation (Currie, 2003). The small existing literature on the labor supply effects of the Food Stamp Program uses structural estimation with little attention to exogenous variation in the program.⁴

In this paper, we take a very different approach to estimating the labor supply effects of the FSP using the introduction of the program as it was phased in across U.S. counties over a relatively gradual period. We utilize the natural experiment afforded by the nationwide rollout of the modern Food Stamp Program during the 1960s and early 1970s. Our identification strategy uses the sharp timing of the county-by-county rollout of the FSP, which was initially constrained by congressional funding authorizations (and ultimately became available in all counties by 1975). While the existing literature limits attention to hours worked, we examine the impacts of the program on labor force participation, annual hours, earnings, and total family cash income. Further, reflecting the universal eligibility in the FSP, we examine impacts on all families, including married couples and families headed by single women. Our “program introduction” research design has the appeal of relying on non-marginal changes in incentives faced by consumers.⁵

Safety net programs, such as AFDC, TANF and food stamps, are designed to insure a basic level of consumption in low-income families. Consequently, benefits in traditional income support programs feature a guarantee—a benefit level if the family has no income. As earnings or income increases, benefits are reduced leading to an implicit tax rate on earnings (called the benefit reduction rate or BRR). Benefits in the FSP also take this form; for example in 2010 a family of three has a food stamp guarantee of $526 per month and the benefit is phased-out using a benefit reduction rate of 30%.⁶ Notably, the benefit reduction rate in the Food Stamp Program is lower than the rate under the old AFDC program or most states’ TANF programs.⁷

As is well known, a family's labor supply response to the income transfer program may partially offset the income and consumption enhancing goals of the program. The guarantee produces an income effect and the benefit reduction rate reduces the net wage leading to an income and substitution effect. Standard static labor supply theory predicts that the program will reduce labor supply on both the extensive (employment) and intensive (hours conditional on work) margins. As a result, it may cost more than $1 in income support payments to increase a low-income family's available cash and near-cash resources by $1.

We use data from the Panel Study of Income Dynamics (PSID) from 1968 to 1978 to examine the impact of the FSP on labor supply, earnings, and income. We employ a difference-in-difference model where the treatment is at the county level, with controls for county and year-fixed effects and state linear time trends. In this model, identification requires that there are no contemporaneous county-level trends that are correlated with food stamp introduction and family economic outcomes. We also estimate a triple-difference model that uses variation across subgroups with varying propensities of being affected by food stamps. Our results are robust to adding controls for possible confounders and event study models further support the validity of the research design.

Overall, our results indicate that recipients of the FSP transfer behave as the theory predicts. Although we find no significant impacts on the overall sample, this may be expected given the relatively low participation rates in the population at large. When we limit to families headed by a single woman—a group much more likely to participate in the program—we find a significant reduction of 183 h worked per year (an intent-to-treat estimate) which given the group's program participation rate implies a treatment-on-the-treated estimate of − 505 h/year. Our triple-difference estimates show a significant reduction in the employment rate with a treatment-on-the-treated estimate of a 24 to 27 percentage point reduction. We find no significant impacts of the FSP on earnings or family income, though the estimates are imprecise.

The remainder of the paper is as follows. Section 2 summarizes the prior literatures and Section 3 provides a history and summary of the Food Stamp Program. Section 4 describes the expected effects of the FSP on labor supply and Section 5 describes the data. Section 6 presents the results and Section 7 discusses the results in the context of the existing literature. Section 8 concludes.