A Model of the Marginal Labor Supply Response to Transfer Programs, with a Historical Illustration

We extend the textbook model of the labor supply response to a transfer program to incorporate responses of those on the margin of participation, which we term the marginal labor supply response. Government policies which alter program participation can have effects on the labor supply of those on the margin which differ from those of inframarginal individuals. The model shows theoretically that the marginal labor supply responses can grow, decline, or remain the same as participation expands and hence are ambiguous in sign. We provide a historical illustration, estimating marginal labor supply responses of single mothers in the 1980s AFDC program, the last program to assume the textbook form of a cash transfer program. The empirical results show a non-monotonic, U-shaped marginal response curve, with marginal labor supply responses small at low participation rates, growing in magnitude as the program expands, but then falling again as participation expands further. The pattern can be explained by changing movements between full-time work, part-time work, and nonwork in response to program expansion. Marginal labor supply responses are quite modest, on average, consistent with the literature, but are larger in certain ranges of participation.