March 18, 1991
"When Working Produces No Gain -- Or Even Worse"
San Jose Mercury News
By Timothy Taylor
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HOW MANY hours would you work if you had to pay for the satisfaction of holding a job? The question isn't hypothetical for California welfare recipients, who may literally reduce their spendable income by working.

The table at right, taken from a recent issue paper by the non-partisan Legislative Analyst's Office, illustrates the point for a hypothetical single-parent family with two children.

The first column gives monthly before-tax income of the family's wage-earner -- think of it as the monthly paycheck. The second column lists spendable income, once welfare payments and food stamps are added and federal taxes are subtracted. The third column then shows the added spendable income from working, as opposed to not working at all.

If the wage-earner in this family chooses not to work at all, the family will receive $852 in spendable income from Aid to Families with Dependent Children (AFDC) and food stamps.

If the wage-earner found a full-time job at slightly above the minimum wage and grossed $800 per month, the family's spendable income increases only $99. The increase is so small for three main reasons. First, the family doesn't keep all of the $800; it pays Social Security taxes. Second, AFDC and food stamp benefits decline as earnings increase. Third, the wage-earner now faces work-related expenses for transportation and child care, which reduce spendable income still further.

More is Less
Working full-time for a gain of $100 per month in spendable income may seem a miserable enough prospect, but matters get still worse. Imagine that the wage-earner is eventually promoted to a job paying about $7.20 an hour, or $1,200 per month.

The promotion means that the family is no longer eligible for AFDC or for food stamps, but is now eligible to begin paying income taxes in addition to Social Security taxes. Because of these adjustments, the family's spendable income actually declines to $714; they are worse off than before the promotion, worse off than if the wage-earner had not worked at all!

In fact, even if our intrepid wage-earner managed to come up with a job paying $8.40 an hour, or $1,400 per month, the family would find that its spendable income is essentially the same as with no earned income at all.

Of course, a complete analysis of the family's situation might include the value of other public assistance programs -- the medical care provided through Medi-Cal, housing assistance, school lunches, and so on -- along with the impact of state income and sales taxes.

But including these factors would only mean that the prospective wage-earner below the poverty line would face losing even more in welfare benefits and paying even more in taxes by going to work, making the disincentives to work even greater.

Clearly, this system needs changing. What might be done to provide greater work incentives to California welfare recipients?

Governor's Proposal
In his most recent budget, Gov. Pete Wilson proposes reducing AFDC benefits for households earning less than $375 per month. One reason for this cut is the state's budgetary crunch, but Wilson has also argued that the reduced welfare will also provide a heightened work incentive.

But while those families with almost no earnings would get less state support, not much would change for poor families with more than $375 in earnings. By working, they would still gain almost no income, and sometimes even lose ground.

A second possibility is to expand California's GAIN program. GAIN stands for Greater Avenues for Independence, and it requires most welfare recipients (except those who have children under the age of 3) to participate in education and job-training as a condition of receiving welfare. It sounds good, but GAIN is a relatively new program, and even the preliminary results about its effectiveness will not be available until October.

Moreover, GAIN doesn't affect the existing disincentives to work. Even if GAIN found a job for a parent with two kids that paid $1,400 per month, the parent would have no financial incentive to take or keep the job.

The ultimate solution to the work disincentives of welfare would involve having the government re-evaluate all its welfare and tax programs, with the goal of assuring that every time a poor person earned a dollar, her spendable income increased. The analysis would also have to consider the value of benefits like medical insurance through Medi-Cal, which aren't received in a cash form, but are surely important to parents with children.

Caseload Climbing
From California's viewpoint, however, that answer is unhelpful. It would require comprehensive federal implementation, which isn't even a speck on the horizon. In addition, reducing government benefits more slowly (or increasing taxes more slowly) would cost money which neither the state nor federal government has.

But California's monthly AFDC caseload has been climbing about 1 percent faster than the growth of the population during the 1980s, and it is now at 750,000. The number of months that AFDC is received is also rising.

Even though California doesn't have the power to solve the welfare trap, it has to suffer the consequences.

STATE'S WELFARE TRAP

As earnings increase, welfare payments decrease and taxes rise. The result is that working may produce only a small gain, or even a loss. All figures are per month, based on a single parent with two children.

Gross earnings Spendable income Gain from working $0 $852 -- $200 $900 $48 $400 $947 $94 $600 $962 $110 $800 $951 $99 $1,000 $910 $58 $1,200 $714 -$138 $1,400 $854 $2 Source: Legislative Analyst's Office, "California's AFDC Program: Current Trends, Issues, and Options," Feb. 13, 1991.

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