This change is not hard to understand. The welfare state has increased the penalties for working and the rewards for not working.

Incentives to Choose Welfare Over Work. According to the CBO, about 50 percent of unwed teen mothers go on welfare within one year of the birth of their first child and 77 percent within five years. Almost half of those on the rolls for three or more of the past five years started their families as unwed teens. ²⁷ The vast majority of teen mothers never finish high school and, without education, have little hope of employment beyond low-skill, minimum wage jobs. The average annual earnings for female high school dropouts are extremely low. In 1992, 18- to 24-year-old dropouts working full time earned $12,900 and 25- to 35-year-olds earned $14,800. ²⁸ (The poverty level in 1992 for a family of three was $11,186.)

Worse, there is little incentive to get off welfare. In Illinois, for example, a teen mother with two children receives $10,876 in cash grants, plus housing and Medicaid benefits. ²⁹ Why should she work 40 hours a week for $2,000 more when it could cause her to lose housing and health care benefits? And who would care for the kids?

Effective Marginal Tax Rates for Low-Income Families. In contrast to the rewards for not working, the penalties for working are quite high. The near-poor face the highest marginal tax rates of any income group. The marginal tax rate is the amount government takes out of an additional dollar of income. As Figure IV shows:

• The withdrawal of food stamps and the Earned Income Tax Credit, when combined with other taxes, can leave a family earning $20,000 with only 30 cents out of each extra dollar of earnings. ³⁰
• If major health reform such as the Mitchell bill had been enacted, a family in this income range would have been left with only 5 cents out of each additional dollar of earnings. ³¹

Statistical Studies. Numerous studies have found a strong correlation between the generosity of welfare and the reduction in work effort. ³² A recent study by economists Anne Hill and June O'Neill found higher benefits directly correlated with increasing numbers of women leaving the labor force to receive welfare benefits. A 50 percent increase in monthly AFDC and food stamp benefits led to a 75 percent increase in the number of women enrolling in AFDC and a 75 percent increase in the number of years spent on AFDC.³³ Other studies, including those from traditionally liberal sources such as the Wisconsin Institute for Research on Poverty and the Urban Institute, have confirmed the problem. For example:

• One study concluded that by 1981 all transfer payments, combined, had reduced the labor force by 4.8 percent -- a number that would equal approximately 6 million people today. ³⁴
• Another study suggested that the Reagan welfare budget cuts in the early 1980s increased the labor force by as many as one million people. ³⁵

Probably the most sweeping welfare study in history was conducted in the 1970s by the federal government's Office of Economic Opportunity to examine the effect of welfare benefits on work effort. The study involved the provision of special welfare benefits to groups of recipients in Seattle and Denver from 1971 to 1978 and became known as the Seattle/Denver Income Maintenance Experiment, or SIME/DIME. The study was designed by advocates of expanding welfare who had hoped it would prove that generous welfare benefits did not adversely affect the degree of work by recipients.

What the study proved, overwhelmingly, was just the opposite. It found that every $1 of extra welfare given to low-income persons reduced labor and earnings by 80 percent. ³⁶ Compared to similarly situated families not on welfare, families who were given the extra income changed their behavior substantially: ³⁷

• The number of hours of work dropped 9 percent for husbands, 20 percent for wives and an incredible 43 percent for young male adults.
• The length of unemployment increased 27 percent for husbands, 42 percent for wives and 60 percent for single female household heads.

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