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Reassessing the 'Race to the Bottom' in State Welfare Policy

By William D. Berry, Richard C. Fording and Russell L. Hanson

Abstract

On the assumption that poor people migrate to obtain better welfare benefits, the magnet hypothesis predicts that a state’s poverty rate increases when its welfare benefit rises faster than benefits in surrounding states. The benefit competition hypothesis proposes that states lower welfare benefits to avoid attracting the poor from neighboring states. Previous investigations, which yield support for these propositions, suffer from weaknesses in model specification and methodology. We correct these deficiencies in a simultaneous equation model including a state’s poverty rate and its benefit level for AFDC (Aid to Families with Dependent Children) as endogenous variables. We estimate the model using pooled annual data for the American states from 1960 to 1990 and find that a state’s poverty rate does not jump significantly when its welfare payments outpace benefits in neighboring states. Furthermore, there is no evidence of vigorous benefit competition among states: states respond to decreases in neighboring states ’ welfare benefits with only small adjustments in their own. Perhaps the most controversial debate in the recent literature on welfare policy concerns the validity of the “race to the bottom ” thesis. This thesis entails propositions about the behavior of both the poor and state policy makers. Patterned after economic theories about location decisions (e.g., Tiebout 1956), the thesis suggests that welfare benefit levels play a significant role in the residential choices of the poor. Specifically, the migration hypothesis predicts that poor persons will migrate from states with low welfare benefits to those with more generous assis

Year: 2003
OAI identifier: oai:CiteSeerX.psu:10.1.1.322.1911
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