WELFARE REFORM AND CHILDREN'S EARLY COGNITIVE DEVELOPMENT

1. INTRODUCTION In 1996, the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) ended Aid for Families with Dependent Children (AFDC), replacing it with the new Temporary Assistance for Needy Families (TANF) program. TANF differs from AFDC by ending the "entitlement" period of welfare via introduction of a time limit on welfare benefits and work requirement for participants. In this paper, we .analyze the impact of this welfare reform on the early cognitive development of welfare program participants' children using a multiperiod structural model. We first estimate the effects of mothers' work and welfare use on children's ability formation using a sample of single mothers and their children from the National Longitudinal- Survey of Youth 1979 (NLSY79) Cohort. We then simulate different policy initiatives of the welfare reform to evaluate how each particular change impacts work and welfare participation behaviors of the mothers, and as a result, children's cognitive development. Early cognitive development has been found to be a strong predictor of long-term achievement and other outcomes such as educational attainment, crime involvement, salaries, and out-of-wedlock pregnancy (see reviews by Currie and Thomas 1995; Duncan and Brooks-Gunn 1997; Haveman and Wolfe 1995). Thus, it is crucial to understand whether, and by how much welfare program participation affects .children's cognitive outcomes. Moreover, any public policy initiative, such as PRWORA, that affects parents' incentives to work or participate in the welfare program by altering the opportunity .costs of parental time and financial inputs should be carefully evaluated. There is an abundance of studies on the effects of welfare reform on mothers' behaviors. However, implications of welfare reform on children's outcomes have not been studied by many. To our knowledge, other than this paper, there is only one other study. Miller and Zhang. (2009), that .analyzes the indirect effects of welfare reform on children's cognitive outcomes. Earlier studies generally find significantly negative relationships between welfare receipt and various types of child attainment measures. However, these negative relationships may not be causal due to improper comparison groups or the unobserved heterogeneity issue that is not addressed (Cunie 1998; Dahl .and Lochner 2012; Duncan, Magnuson, and Ludwig 2004). Chyi and Ozturk (2013) show that welfare program participation is not detrimental to early development of the children when the analysis is constrained to families who are most disadvantaged (and thus likely to be eligible for welfare benefits) and when unobserved heterogeneity is properly controlled for. We follow their lead and focus only on the attainment of children born to single mothers with 12 or fewer years of schooling. We model unobserved heterogeneity and use exogenous variations in welfare benefits across states and local labor market conditions to alleviate concerns of endogeneity. Moreover, we incorporate the dynamic nature of welfare program participation and employment decisions into our econometric setup. We estimate structural parameters of our model which enable us to run policy simulations with counterfactuals that imitate the changes brought upon by PRWORA. Thus, we not only provide insight on how welfare and employment affect the children's cognitive development, but .also document behavioral responses to the welfare reform and resulting impact on children's outcomes. Our estimates show that on average mother's work and welfare use both are beneficial for children's cognitive development. In our model, their effects are allowed to vary by children's ability endowment and they do; we find that benefits are highest for children with low endowment. Moreover, we allow the effects to vary by mother's attitudes toward welfare receipt and work and by her ability to utilize resources in child-rearing. We model unobserved heterogeneity in these dimensions and identify two types of mothers: mothers who are not likely to use welfare but are very efficient at using welfare resources if they do (Type I) and mothers who are very likely to use welfare but are not efficient at utilizing welfare resources (Type II). …