A Model of the Marginal Labor Supply Response to Transfer Programs, with a Historical Illustration

Abstract

We estimate the effects of welfare program participation on the labor supply of those who are on the margin of participation. We develop a local IV method that can semiparametrically estimate the shape of the marginal labor supply response curve as participation grows and declines. In an application to the historical AFDC program and using an instrument for program participation costs, we estimate a quadratic curve, rising and then falling as participation rates rise The average work disincentive is modest in size but there are some margins where effects are sizable and some where it is effectively zero.