Unbiased Analysis of Today's Healthcare Issues

Welfare vs. Workfare

Written By: Jason Shafrin - Jun• 14•06

In 1996, the Personal Responsibility and Work Opportunity Act (PRWORA) brought ‘workfare’ into the spotlight.  In addition to replacing the old AFDC program with the new TANF (Temporary Aid to Needy Families), the law required welfare recipients to work or to look for work in order to receive benefits.  This was not the first time in history work requirements have been instituted.  In England, the Poor Law of 1834 granted poor relief through residence in a workhouse.  In 18th century France charity workshops were the means by which poverty relief was granted.  Is workfare good public policy?

Besley and Coate (1992) aim to answer this question theoretically by creating a simple economic model.  They assume two types of people: type ‘a_l are low wage earners and type ‘a_h‘ are high wage workers with an hourly wage of a_l and a_h respectively.  The authors aim to institute a poverty elimination program {b,c} where b is the benefit individuals receive and c is the cost in terms of a work requirement.  The poverty line is at ‘z‘.  Workers earn a*[l(a)-c], where l(a) is the labor supply of the individual.  The goal of the policymaker is to minimize the cost while ensuring that all individuals consume at least ‘z‘.  If income generating abilities are observable, that it is easy to see that the policy is to give [z-y(0,a_l)] to low ability workers and nothing to high ability workers.

What if worker ability is unobservable?  There are two options.  In the first case, we can give both workers [z-y(0,a_l)].  In the other, the work requirement can be used as a screening device so that only low ability individuals will apply for the welfare package {b,c}.  The benefit package will be set [b=z-y(c’,a_l); c=c’] so that the high ability individuals will not pretend to be low ability because they benefit (b) is not worth wasting their more valuable time doing (c) hours of workfare. 

One final item of note is that workfare can be used as a deterrent.  It is possible that individuals will not make human capital investments (in education, etc.) if welfare exists since they will be able to consume ‘z‘ regardless of their productivity.  If we impose a high work requirement, a young individual may decide to invest in human capital in order consume more than z and also spend less time in non-productive labor (c).

This model is very simple, but does elucidate workfare’s importance potential as a screening mechanism.  Having the work requirement (c) be entirely non-productive is an inessential assumption but does simplify the analysis.  This argument does not take into account from the possibility of ‘tagging‘ individuals [see Akerlof (AER ’78)] which may be efficient more effective.  If we can observe some immutable characteristics which we know lead to low earnings potential (such as being disabled, mentally challenged, etc.), the directing funds to these individuals does not distort work incentives.  Tagging is usually imperfect and does add to the administrative costs of running the welfare program. 

Besley and Coate (1992) “Workfare versus welfare: Incentive arguments for work requirements in poverty-alleviation programs” American Economic Review, 82(1) pp. 249-261.

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  1. […] Both of the previous reasons I believe are not valid justifications to use bureaucratic transfers of funds in lieu of direct monetary transfers.  One good reason is the “tagging” argument (see June 14th post).  If those who are medically needy are the ones that use the free medical services, than this could be more efficient.  On the other hand, if many people who otherwise would use private health insurance decide to use the free medical services because it is now of a higher quality, it would decrease efficiency. […]