Marriage, Social Insurance and Labor Supply

This paper develops a model of marriage, labor supply, savings and divorce under limited commitment and uses it to understand the impact of major welfare reforms, including the time-limited eligibility in the TANF program. In the model, taxes and welfare can affect whether marriage and divorce take place, the extent to which people work as single or as married individuals, as well as the allocation of resources within marriage. The model thus provides a framework for estimating not only the short-term effects of welfare reforms on labor supply, but also the extent to which welfare benefits affect family formation and the way that transfers are targeted within the family. This is particularly important because many of these benefits ultimately are designed to support the wellbeing of women and children. The limited commitment framework in our model allows us to capture the effects on existing marriages as well as marriages that will form after the reform has taken place, offering a better understanding of transitional impacts as well as longer run steady state effects. Using variation provided by the introduction of time limits in welfare benefits eligibility following the Personal Responsibility and Work Opportunity Act of 1996 (welfare reform) and data from the Survey of Income and Program Participation between 1985 and 2011, we provide reduced form evidence of the importance of these reforms on a number of outcomes relevant to our model. We then estimate the parameters of the model using the same source of variation.