When Is It Bad for People to Change Safety Net Programs?

How easy it is for people to get around both the labor market and the programs they're part of affects the effects of policy changes.

The U.S. safety net has many parts that move. Redistributive transfers are made in cash and in kind, often through regulation, and are done by many levels of government. They are often done by the federal government. Arrangements for health care and health insurance are very complicated for low-income families because they have to figure out how to get free care, Medicaid, subsidized coverage, and insurance from their employers.

Policymakers change the rules of a program all the time. Any policy change, of course, hinges on the specifics of the program in question. Our work asks a question that isn't the same as the kind of question that is usually asked about welfare programs. We want to know if policy changes in and of themselves can have an effect on the well-being of people who get help through the program.

How easy it is for people to get around both the labor market and the programs they're part of affects the effects of policy changes. Changes in the generosity and eligibility rules of programs can affect people's budgets in both planned and unplanned ways. If you have a hard time responding to these changes, they could cost a lot of money. Alternatively, if it takes little effort for beneficiaries to adapt, such changes may be a nuisance rather than a real problem. To show how important adjustment costs are, we look at a situation that is just right for this. We look at how working Medicaid beneficiaries react to increases in the minimum wage. We do this both empirically and theoretically. When the minimum wage rises, jobs that allowed people to keep their Medicaid benefits may no longer be able to do so. Because Medicaid eligibility is phased out with a "notch," even small changes in income can make you ineligible for benefits worth tens of thousands of dollars. In addition to affecting labor demand, which has been studied in a lot of literature, a rise in the minimum wage could also have unexpected effects on workers' preferences for hours of work in this case.

When Medicaid eligibility notches and the minimum wage work together, the consequences depend on things like how much it costs to look for a job and how rigid job offers are from businesses. If the change is seamless, a shift in a notch's location (the wage limit set for eligibility) may not have a big impact on welfare. Workers who are moved out of eligibility can cut their hours a little to keep their benefits. If there are a lot of problems in the labor market, though, cutting hours might be very expensive because you might have to look for a new job. Workers who move up a notch may lose benefits while they look for work that allows them to work fewer hours. Some people may leave their jobs in order to keep their benefits. People who lose benefits, lose money they earned, and spend a lot of time looking for help are all costs. The location of an eligibility notch can have a big impact on the consequences of moving it. This is because these frictions are very important.

Analyzing the program you're interested in needs a lot of data on wage rates, Medicaid participation, employment, and job searches. The Survey of Income and Program Participation (SIPP) is the best tool for this job. Estimate how low-wage adult Medicaid beneficiaries will react to the federal minimum wage going up in July 2009. We used data from the 2008 SIPP panel to do this. There was a rise in the federal minimum wage in July 2009. It went from $6.55 an hour to $7.25 an hour. In many states, the effective minimum wage went up 40% between 2007 and 2009. It went from $5.15 to $7.25, and many states saw this happen. People in states where the minimum wage was lower than $7.25 were more likely to be affected by these increases than people in states where the minimum wage was higher than $7.25.

For low-wage workers, the cumulative $2.10 minimum wage rise meant a 40% cut in the number of hours they had to work to qualify for Medicaid. It's very important that this period had low eligibility thresholds. Often, they were below 50% of the federal poverty line. Adults in many states might have a hard time keeping their jobs and getting Medicaid because of this.

In our sample of people who were affected by minimum wage rises, Medicaid participation dropped, employment fell, and job searches went up after the rises. The results show that low-skilled workers have to pay a lot of money to change jobs in the labor market.

There are two problems with assuming that the changes in employment, insurance status, and job searches that have been seen are caused by the interaction between the minimum wage and the Medicaid notch. First, the states that raised the minimum wage during this time period also had low Medicaid eligibility thresholds. Medicaid beneficiaries who work and live in "bound" states may have had different transitions from those who live in "unbound" states if the minimum wage hadn't been raised. We look at how similar samples changed during previous SIPP panels to see if this problem is important. We found that working Medicaid beneficiaries in bound states were indeed more likely to leave Medicaid in the past, but only a little.

Second, the Great Recession may have had different effects on jobs and insurance in different states. We then look at how well our results hold up if we include proxies for how bad the Great Recession was. Our baseline analysis takes into account a price index from the Federal Housing Finance Agency when it comes to housing prices. We show that different ways of controlling for changes in the severity of the Great Recession have little effect on our estimates. The changes in jobs and insurance we see don't seem to have been caused by changes in macroeconomic factors.

Our study adds to work already done on the costs of administratively complicated benefit designs. They say that the costs of adapting to changes in complex benefit designs are important to the question of how society should build its safety net. The setting we study also gives us a chance to learn about labor markets in a new way. In our study, we found that labor market frictions can be big, while other studies only look at middle- to high-income taxpayers and the elderly when they talk about frictions. Our evidence suggests that frictions may also play a role in understanding how low-income support programs affect labor supply.

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