  Existing research on the static effects of the manipulation of welfare
program benefit parameters on labor supply has allowed only restrictive forms
of heterogeneity in preferences. Yet preference heterogeneity implies that the
marginal effects on labor supply of welfare expansions and contractions may
differ in different time periods with different populations and which sweep out
different portions of the distribution of preferences. A new examination of the
heavily studied AFDC program uses variation in state-level administrative
barriers to entering the program in the late 1980s and early 1990s to estimate
the marginal labor supply effects of changes in program participation induced
by that variation. The estimates are obtained from a theory-consistent reduced
form model which allows for a nonparametric specification of how changes in
welfare program participation affect labor supply on the margin. Estimates
using a form of local instrumental variables show that the marginal treatment
effects are quadratic, rising and then falling as participation rates rise
(i.e., becoming more negative then less negative on hours of work). The average
work disincentive is not large but that masks some margins where effects are
close to zero and some which are sizable. Traditional IV which estimates a
weighted average of marginal effects gives a misleading picture of marginal
responses. A counterfactual exercise which applies the estimates to three
historical reform periods in 1967, 1981, and 1996 when the program tax rate was
significantly altered shows that marginal labor supply responses differed in
each period because of differences in the level of participation in the period
and the composition of who was on the program.
