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Welfare Benefits, Minimum Wage Rate and the Duration of Welfare Spells: Evidence from a Natural Experiment in Canada

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  • Bernard Fortin

    ()

  • Guy Lacroix

    ()

Abstract

In this paper we analyze the impact of benefits on the length of welfare spells. It introduces a natural experiment approach of comparing the length of welfare spells before and after a major reform of the welfare program that took place in Québec in August 1989. An important feature of this reform was the abolishment of discrimination based on age that applied to single individuals and childless couples below the age of thirty. With the reform, their monthly benefits rose from $173 (in dollars of 1986) to $425, an increase of over 145%. To analyze the impact of the reform, we utilize a semi-parametric duration model with time-varying covariates such as welfare benefits, minimum wage rate, unemployment rate, etc. We find that benefits have an important impact on spell duration of individuals below thirty years of age. We also find that the minimum wage rate has an adverse effect on the duration of individuals in the 18-24 age group, but a positive effect on those in the 25-29 age group. Finally, our estimates suggest that the reform increased duration on welfare by 2 to 4.5 months. Dans cet article, nous étudions la relation entre le niveau des prestations et la durée de séjour à la sécurité sociale. L'analyse repose sur une approche dite d'expérience naturelle et consiste à comparer la durée de séjour avant et après l'introduction de la réforme majeure qui a eu lieu en 1989 au Québec. Un volet important de cette réforme consistait à éliminer l'écart de prestations entre les individus et les couples sans enfants de moins de trente ans et les bénéficiaires agés de plus de trente ans. Les prestations des moins de trente ans sont ainsi passées de 173$ par mois ($ de 1986) à plus de 425$ par mois, soit une augmentation de 145 %. L'impact de ce changement est analysé à l'aide d'un modèle de durée semi-paramétrique qui incorpore des variables exogènes qui dépendent du temps, tels les prestations, le salaire minimum, le taux de chômage, etc. Par ailleurs, une hausse du salaire minimum a pour effet d'augmenter la durée de séjour à la sécurité sociale des individus âgés entre 18 et 24 ans,0501s de diminuer la durée de séjour de ceux âgés entre 25 et 29 ans. Enfin, nos résultats montrent que la réforme a eu pour effet d'augmenter la durée de séjour d'environ 2 à 4,5 mois.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 97s-25.

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Date of creation: 01 May 1997
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Handle: RePEc:cir:cirwor:97s-25

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Keywords: Welfare benefits; minimum wage; semi-parametric duration model; Prestations de sécurité sociale; salaire minimum; modèle de durée semi-paramétrique;

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  1. Nickell, Stephen J, 1979. "Estimating the Probability of Leaving Unemployment," Econometrica, Econometric Society, vol. 47(5), pages 1249-66, September.
  2. Bruce D. Meyer, 1988. "Unemployment Insurance And Unemployment Spells," NBER Working Papers 2546, National Bureau of Economic Research, Inc.
  3. Christian Belzil, 1993. "An Empirical Model of Job-to-Job Transition with Self-Selectivity," Canadian Journal of Economics, Canadian Economics Association, vol. 26(3), pages 536-51, August.
  4. Michael Charette & Ronald Meng, 1994. "The Determinants of Welfare Participation of Female Heads of Household in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 27(2), pages 290-306, May.
  5. Michael Baker & Samuel A. Rea, Jr., 1994. "Employment Spells and Unemployment Insurance Eligibility Requirements," Working Papers reas-95-02, University of Toronto, Department of Economics.
  6. Lancaster, Tony, 1979. "Econometric Methods for the Duration of Unemployment," Econometrica, Econometric Society, vol. 47(4), pages 939-56, July.
  7. Ham, John C & Rea, Samuel A, Jr, 1987. "Unemployment Insurance and Male Unemployment Duration in Canada," Journal of Labor Economics, University of Chicago Press, vol. 5(3), pages 325-53, July.
  8. Dolton, Peter J & van der Klaauw, Wilbert, 1995. "Leaving Teaching in the UK: A Duration Analysis," Economic Journal, Royal Economic Society, vol. 105(429), pages 431-44, March.
  9. O'Neill, June A & Bassi, Laurie J & Wolf, Douglas A, 1987. "The Duration of Welfare Spells," The Review of Economics and Statistics, MIT Press, vol. 69(2), pages 241-48, May.
  10. Moffitt, Robert, 1983. "An Economic Model of Welfare Stigma," American Economic Review, American Economic Association, vol. 73(5), pages 1023-35, December.
  11. Anderson, Patricia M, 1992. "Time-Varying Effects of Recall Expectation, a Reemployment Bonus, and Job Counseling on Unemployment Durations," Journal of Labor Economics, University of Chicago Press, vol. 10(1), pages 99-115, January.
  12. Lawrence F. Katz & Bruce D. Meyer, 1988. "The Impact of the Potential Duration of Unemployment Benefits on the Duration of Unemployment," NBER Working Papers 2741, National Bureau of Economic Research, Inc.
  13. Blank, Rebecca M., 1989. "Analyzing the length of welfare spells," Journal of Public Economics, Elsevier, vol. 39(3), pages 245-273, August.
  14. Hanoch, Giora & Honig, Marjorie, 1978. "The labor supply curve under income maintenance programs," Journal of Public Economics, Elsevier, vol. 9(1), pages 1-16, February.
  15. Heckman, James J & Borjas, George J, 1980. "Does Unemployment Cause Future Unemployment? Definitions, Questions and Answers from a Continuous Time Model of Heterogeneity and State Dependence," Economica, London School of Economics and Political Science, vol. 47(187), pages 247-83, August.
  16. Fortin, B. & Truchon, M., 1990. "On Reforming the Welfare System: Workfare Meets the Negative Income Tax," Cahiers de recherche 9016, Université Laval - Département d'économique.
  17. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March.
  18. Arulampalam, Wiji & Stewart, Mark B, 1995. "The Determinants of Individual Unemployment Durations in an Era of High Unemployment," Economic Journal, Royal Economic Society, vol. 105(429), pages 321-32, March.
  19. Olsen, Randall J & Smith, D Alton & Farkas, George, 1986. "Structural and Reduced-Form Models of Choice among Alternatives in Continuous Time: Youth Employment under a Guaranteed Jobs Program," Econometrica, Econometric Society, vol. 54(2), pages 375-94, March.
  20. Han, Aaron & Hausman, Jerry A, 1990. "Flexible Parametric Estimation of Duration and Competing Risk Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(1), pages 1-28, January-M.
  21. Hoynes, Hilary & MaCurdy, Thomas, 1994. "Has the Decline in Benefits Shortened Welfare Spells?," American Economic Review, American Economic Association, vol. 84(2), pages 43-48, May.
  22. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June.
  23. Allen, Douglas W, 1993. "Welfare and the Family: The Canadian Experience," Journal of Labor Economics, University of Chicago Press, vol. 11(1), pages S201-23, January.
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Cited by:
  1. van den Berg, Gerard J & van der Klaauw, Bas & van Ours, Jan C, 2000. "Punitive Sanctions and the Transition Rate From Welfare to Work," CEPR Discussion Papers 2447, C.E.P.R. Discussion Papers.
  2. Fortin, Bernard, 1998. "Dépendance à l'égard de l'aide sociale et réforme de la sécurité du revenu," Cahiers de recherche 9803, Université Laval - Département d'économique.
  3. Dalit Contini & Matteo Richiardi, 2009. "Welfare stigma with decreasing employability," LABORatorio R. Revelli Working Papers Series 90, LABORatorio R. Revelli, Centre for Employment Studies.
  4. Guy Lacroix & Gino Santarossa & Pierre Gagné, 2003. "Une analyse de la dynamique de la dépendance à l'assistance-emploi des populations natives et immigrantes québécoises," CIRANO Project Reports 2003rp-14, CIRANO.
  5. Picot, Garnett & Frenette, Marc, 2003. "La vie apres l'aide sociale : le bien-etre economique des personnes qui ont cesse de toucher de l'aide sociale au Canada dans les annees 90," Direction des etudes analytiques : documents de recherche 2003192f, Statistics Canada, Direction des etudes analytiques.
  6. Hilary W. Hoynes & Kenneth Y. Chay & Dean Hyslop, 2004. "True State Dependence In Monthly Welfare Participation:A Nonexperimental Analysis," Working Papers 533, University of California, Davis, Department of Economics.
  7. Berg, G. van den & Klaauw, B. van der & Ours, J.C. van, 1998. "Punitive sanctions and the transition from welfare to work," Discussion Paper 1998-56, Tilburg University, Center for Economic Research.
  8. Picot, Garnett & Frenette, Marc, 2003. "Life After Welfare: The Economic Well-being of Welfare Leavers in Canada During the 1990s," Analytical Studies Branch Research Paper Series 2003192e, Statistics Canada, Analytical Studies Branch.

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