Even the underprivileged are rational: The incentive effects of welfare

Tanner and Moore (1995) calculate welfare equivalent wages for the six most common social programs for each of the 50 states and the District of Columbia. They assert that individuals who choose public assistance over work are responding rationally to incentives of the welfare system, but they offer no evidence. I present statistically significant support for Tanner and Moore’s assertion. Among potential welfare recipients, a one dollar increase in the welfare equivalent wage is found to increase the welfare take-up rate by approximately 2.7 percentage points and decrease the labor force participation rate by approximately 2.5 percentage points. I thank John Dawson, Don Nimey, Michelle W. Trawick, and an anonymous referee for helpful comments. The usual caveat applies.