THE EFFECT OF WELFARE ASSET RULES ON AUTO OWNERSHIP, EMPLOYMENT, AND WELFARE PARTICIPATION: A LONGITUDINAL ANALYSIS

This paper investigates how asset tests for welfare eligibility affect ,auto ownership, employment, and welfare participation for single mothers without a college degree. We combine longitudinal data from the 1996 Survey of Income and Program Participation with data on state-level welfare program rules from the Urban Institute and data .on state-level controls to test whether these single mothers were more likely to (1) own a car, (2) be employed, and (3) be off of welfare, depending on the welfare asset rules instituted in their state. We find evidence that, taken as a group, the asset rules have a statistically significant effect on the probability of car ownership. Ordinary least squares results and cross-sectional two-stage least squares (2SLS) results using the asset rules to instrument for car ownership show a large, positive, statistically significant effect of car ownership on employment. However, in 2SLS models controlling for prior car ownership and prior employment, the asset instruments are weaker and we do not find an effect of car ownership. on employment. Of significance for policy makers, we find that the asset rules do not have a statistically signfficant joint effect on we/fire participation, even after addressing possible endogeneity. (JEL 138, J68. J08) I. INTRODUCTION Welfare eligibility rules regarding auto ownership have changed substantially since the mid-1990s. We exploit these changes to address the following questions: (1) Does the relaxation of welfare asset rules increase auto ownership? (2) Does increased auto ownership, in turn, increase employment among likely welfare recipients? and (3) What is the effect of autorelated welfare eligibility rules on welfare participation? Understanding the role of eligibility rules in encouraging or discouraging employment through the path of auto ownership is important for a welfare system that seeks to facilitate transitions from welfare to work. However, relaxing asset-related eligibility rules could have costs in terms of higher welfare participation as well as benefits in terms of increased employment, and it is important to take both into consideration when policy makers shape those eligibility rules. While existing literature has examined a number of questions related to the impact of public policy on savings, car ownership, employment, and welfare participation, our paper expands upon this work in a number of dimensions. Unlike the existing studies related to these issues, our paper builds on a limited literature on the effects of welfare asset rules on auto ownership by using a broader set of asset rules, and these additional rules are found to have a statistically significant effect on car ownership. Second, we use a unique longitudinal strategy by adding lagged dependent variables as explanatory variables and we compare these results to those based on cross-sectional estimation. Importantly, we also examine the effects of asset rules on welfare participation and find that, taken as a group, the rules do not have a statistically significant joint effect on welfare participation. For policy makers, these results suggest that making welfare asset rules more generous would increase car ownership and employment, without increasing welfare participation. The paper is organized as follows: Section II discusses the policy context for our study of the relationship between welfare reform and labor market outcomes. In Section III, we discuss the previous literature and our contribution to the policy discussion. Our empirical methodology and our lagged dependent variable model are spelled out in Section IV followed by a description of the data in Section V. The main empirical results examining our three key dependent variables (car ownership, employment, and welfare participation) are discussed in Section VI. We present some validity checks and direct comparisons with previous work in Section VII and conclude in Section VIII. …