Wednesday, February 29, 2012

Welfare reform

New Zealand moves towards welfare reform, with a greater emphasis on moving recipients, especially those on the DPB (our version of AFDC) into work. Those with children aged 14 and up will be expected to make serious efforts to find full time work; those with children over the age of 5 should be finding part-time work.

The change will, hopefully, lead to most income support for single mothers being handled through Working for Families, a wage subsidy scheme similar to the EITC, and indirect subsidies for childcare via both government subsidization of early childhood centrestax credits for childcare expenses, and additional subsidies for childcare for low income families.

My usual worry on requiring parents on the DPB to seek work when their youngest child hits age X is that it provides reasonable incentive to have another child at that point: if MSD made data available, it would be awfully interesting to run probit on likelihood of an additional birth conditional on hitting that age threshold. Apparently 4,000 children were born last year to women who were already receiving the Domestic Purposes Benefit.

The latest changes have taken some account of this incentive. The birth of an additional child while on benefit provides one-year's respite, followed by a resumption of the status that existed ex ante. So if your youngest child was 5 when the next one came along, the expectation of part-time work would resume after the one-year hiatus. The Greens were worried the government might go farther and require long term contraception as condition of receiving a child-related support package; it looks like National's not going that way. It's not immediately obvious to me why such requirements are so objectionable, but neither is it obvious that the chosen policy alternative won't work. If we're going to worry about fiscal externalities imposed by those who choose to drink too much, or perhaps even ski without helmets, I can't see what logically keeps this off the table.

The changes also incorporate some targeted paternalism. Teen parents and young people on benefits will receive extra payments for completing budgeting and parenting courses; rather than receiving payments directly, their rent and utilities will be paid directly by the government with remaining funds under stricter monitoring through payment cards. Bill Kaye-Blake doesn't like the programme's paternalism:
The ‘managed system of payments’ just sounds awful. It message is, ‘You haven’t learned to take care of yourself, so we’ll just do it for you. Here’s your pocket money’.
I'm no particular fan of paternalism either. But if it's going to be anywhere, targeting it here isn't crazy. Scott Beaulier and Bryan Caplan make a pretty convincing argument that the behavioural anomalies that behavioural economists worry about hold especially strongly among the poor. Note: my post above-linked suffered linkrot; the original Beaulier & Caplan article is here. Beaulier and Caplan argue for reducing the size of the welfare state, but you can also take the article as implying that welfare payments ought to be combined with fairly prescriptive approaches to benefit use combined with directed training to help recipients learn the skills to help keep them off of benefits when time limits hit. Combining the paternalism with training to wean them off the paternalism doesn't sound nuts.

Bill worries too about consequences for existing children whose parents are on the benefit. I'd share some of those worries, but just look at the scope of support already available to working poor families. And payments aren't killed for failure to find a job given an honest attempt; they're killed by proving to a welfare case officer that you're utterly uninterested in trying to find work.

More broadly, the reforms are in keeping with a reasonable social contract for social support payments. Middle class support for welfare disintegrates when it becomes seen as a way of life for those who could work but choose not to. Charles Murray documented that in the US in the 1980s; Bill Clinton's welfare reform followed. Reforming welfare such that it provides temporary support for those falling on hard times, longer-term support for the disabled, and incentives keeping those getting a helping hand from becoming dependent on the system is a pretty good way of ensuring that the social compact over welfare doesn't break down over the longer term. The Greens' complaint that it's unfair  to require DPB mothers to look for work after a year rings pretty hollow for those of us whose kids have been in daycare since they were three months old so we could earn enough to pay the taxes to pay for the system.

Critics also ought to keep in mind that, the longer things are left before reform, the greater the likely support for tougher approaches. American welfare reform brought lifetime maximum welfare eligibility of 5 years for most folks.

Do follow Lindsay Mitchell for what's likely to be the best ongoing coverage of NZ welfare reform.


  1. I tend to agree with most of your points, although I would struggle to accept any contraception requirements as excessive paternalism. In my opinion, this tweet has been the funniest summary of the welfare reform announcement.

    1. Utilitarianism breaks once we start letting N be a choice variable; the standard economic framework runs into difficulties. But, with my economics hat off, what public policy purpose is served by subsidizing the least capable cohort to have more kids?

    2. Any bets on whether we helped these fine parents produce more kids? If there were an iPredict contract, I'd be paying $0.85 on DPB involvement.

  2. My problem with welfare reform aimed at getting people into work is having jobs to go to. That is, if the government is serious getting people into jobs then it needs to reform the labour market at the same time it reforms welfare. An unreformed labour market will have trouble adjusting to having a new intake of people looking for work. Given the level of unemployment we have at the lower skill/experience end of the labour market having a whole bunch more people entering it isn't going to end well.

    1. It doesn't help that they just increased the minimum wage - agreed completely. Everything that ought to be done by the minimum wage is far better done by income transfers through WFF.

      Easing up on the ECE regs could also help. Instead of requiring that 100% of daycare teachers have formal certification, why not let half of them be apprentice trainees getting on-the-job training? There'll be increased demand for ECE with moms coming off the DPB; some could be hired into those centres....

  3. agree the current labour market regulation works against this esp given the price/quality of much of the labour we are talking about. and this?

    1. Sure, it would have been better to do this back in 2005 when the economy was booming. Shame Labour didn't do it then - rolling out WFF at the same time as serious welfare reform would have been a really good move.

      But again - the regs don't punish mothers for failing to find work, only for failing to make a serious effort.


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