work incentive experiments

8/9/2019 Work Incentive Experiments

1/175

WORK INCENTIVE EXPERIMENTS

IN

THE UNITED STATES AND CANADA

Research Paper No. 12Research and Statistics BranchDevelopment DivisionDepartment of Social SecurityJune 1981


2/175

WORK INCENTIVE EXPERIMENTS IN THE UNITED STATES AND CANADA

This paper has been prepared in the Research and Statistics Branch of the Development Division of theDepartment of Social Security. The author of the paper is Peter Whiteford, a senior project officer in theBranch.


3/175

ISBN 0 642 51468 2


4/175

This series of papers deals with various aspects of income maintenance and related subjects. It is intended tobe of use to researchers and others interested in social security. Views expressed are those of individualauthors and are not necessarily those of the Department of Social Security.


5/175

(i)

FOREWORD

If people are paid a guaranteed minimum income (GMI) will they reduce their hours of work or give up work

entirely? The concern that the receipt of welfare payments and the income tests applied to these paymentsmay act as work disincentives is an important factor in public debate and consideration of incomemaintenance alternatives. Until recently there has been only limited empirical evidence on how peopleactually behave when they are paid a GMI. However, between 1967 and 1978 a series of social experimentswas carried out in the United States and Canada to investigate the effects of a guaranteed income on the workbehaviour of families.

The results of these experiments are of direct interest to Australia, for in the past decade there has beenconsiderable support for proposals to reform the income security system through the provision of some formof GMI. There has also been considerable disagreement about the effect of such reforms on work incentives.The Commission of Inquiry into Poverty , for instance, felt that its proposed GMI would not damage work

incentives, because "Australians have no respect for the bludger, and nobody is anxious to acquire suchstatus", and argued that this assessment was confirmed by the results of the U.S. experiments (1975, pp.39-40). The Priorities Review Staff also considered that the U.S. evidence showed that the number of hoursworked by primary wage earners was not significantly affected by income guarantees (1975, p.11). Morerecently, concern with work disincentives has been described in the Australian Financial Review as "thatfavourite chestnut of taxation reform" (February 6, 1980, p.11). In contrast, the Report of the TaxationReview Committee argued that a GMI would seem likely to have consequences for incentives to work andsave which make it impossible to consider such a scheme seriously (1975, pp.30-31). Evidently, this is anarea of some disagreement.

The purpose of this paper is to provide a detailed guide to the main features of the U.S. and Canadian

experiments - the characteristics of the samples, the experimental design, the rules of operation and theadministrative procedures, the data analysis, and in particular the various research findings. In Part 1 thegeneral background to the U.S. income maintenance experiments is discussed. Part 1.1 analyses the "War onPoverty" and the specific historical situation out of which these experiments developed. Part 1.2 discussesone form of GMI, the negative income tax, as a stragegy for dealing with poverty, and Part 1.3 deals with thework incentives problem associated with this strategy, and the labour supply theory underlying it. In Part 1.4,the decision to undertake a series of experiments is discussed within the context of alternative methods ofanalysing the labour supply effects of a negative income tax.


6/175

(ii)

Part 2 deals with the first of these experiments - the New Jersey experiment which started in 1967 - details itsspecific background, the sample and the design of the experiment, and the experimental findings. A numberof comments are made about the adequacy of the methodology and the nature of the findings of this

experiment. In Part 3, the Rural (Iowa - North Carolina) experiment is discussed in similar detail; in Part 4,the Gary experiment; and in Part 5, the Seattle-Denver experiment. The Canadian "Mincome Manitoba"experiment is discussed in Part 6. Mincome Manitoba had an entirely different background to that of the U.S.social experiments, and was more recent in origin, so that this discussion is self-contained, although assimilar as possible in organisation and detail to the other parts of the paper. In Part 7, an evaluation of theexperiments is offered. The major issues considered are the work incentives problem and how far theseexperiments can go towards resolving it, the relevance of the experiments to Australian conditions, the debatein Australia on the desirability of a guaranteed income, and experimentation as a social policy strategy.Certain administrative, operational and analytical features were common to all the experiments and these arediscussed in the appendices.

The literature on all these topics is vast, but of limited availability. For instance, there are six volumes of"official" documentation on the Rural Income Maintenance experiment alone, but none of these volumes wasobtainable at the time of writing; the Gary and Seattle-Denver experiments are served by less thancomprehensive summaries; analysis of Mincome Manitoba has not been finalised by the researchers. Thisleaves scope for substantial revision of this paper in future years.

ACKNOWLEDGEMENTS

I would like to thank the many officers of the Development Division of the Department of Social Securitywho provided very considerable assistance in the preparation of this paper.


7/175

(iii)

WORK INCENTIVE EXPERIMENTSIN THE UNITED STATES AND CANADA

1. INTRODUCTION PAGE

1.1 The "War on Poverty" 11.2 Negative Income Taxation 71.3 Work Incentives 181.4 Social Experimentation 23

2. THE NEW JERSEY EXPERIMENT

2.1 Background 34

Origin and objectivesDuration and cost

2.2 The Sample and Experimental Design 36

Eligibility criteriaSample selectionCharacteristics of the sampleExperimental treatmentsSample attrition rateAdministrative features of the experiment

2.3 Findings 41

2.4 Comments 53

3. THE RURAL EXPERIMENT

3.1 Background 58



Eligibility criteria

Sample selectionCharacteristics of the sampleExperimental treatmentsSample attrition rate

3.3 Findings 63

3.4 Comments 72


8/175

(iv)

PAGE

4. THE GARY EXPERIMENT

4.1 Background 76



Eligibility criteriaSample selectionCharacteristics of the sampleExperimental treatmentsSample attrition rate

4.3 Findings 82

4.4 Comments 86

5. THE SEATTLE-DENVER EXPERIMENT

5.1 Background 88



Eligibility criteriaSample selectionCharacteristics of the sampleExperimental treatments

5.3 Findings 93

5.4 Comments 101

6. MINCOME MANITOBA

6.1 Background 102



Eligibility criteriaSample selectionCharacteristics of the sampleExperimental treatments


9/175

(v)

PAGE

6.3 Analysis of Data 109

6.4 Comments 110

7. CONCLUSION 113

7.1 Work Incentives and Income Security -Answering Policy Questions 113

7.2 Possibilities for Social Welfare in Australia -A Guaranteed Income? 122

7.3 Social Experimentation and Public Policy -Asking Policy Questions 131

APPENDIX ONE : Administrative Features of the 135Experiments

APPENDIX TWO : Rules of Operation 138APPENDIX THREE : Analysis of Data 142

BIBLIOGRAPHY 145


10/175

1. INTRODUCTION1.1 The "War on Poverty"

Income maintenance experiments in the United States were established against the background of President

Johnson's 1964 State of the Union Message, that "The Administration today, here and now, declaresunconditional war on poverty in America". The political antecedents of this "War on Poverty" were complex,and are open to varying interpretations. At least three main factors were preconditions for and continuinginfluences on the complex of social programs and the growth in welfare expenditure that constituted the"War on Poverty".

First, successive Administrations after 1960 were broadly committed to the abolition of poverty and reformof the income security system. Indeed, Moynihan (1969, p.6) felt that Kennedy's Presidential campaign hadpropounded a fairly radical critique of American society. Kennedy's exposure to poverty while electioneeringin West Virginia (which was significant in the closely contested 1960 election) seems to have impressed onhim the need for action in this area. More importantly, Johnson's sweeping Presidential victory was

accompanied in 1965 by the re-emergence, for the first time since 1938, of a liberal Democrat majority inCongress. President Nixon's welfare reform proposal, the Family Assistance Plan carried on this politicalcommitment, as more recently did President Carter's proposed Program for Better Jobs and Income.

Second, the period 1960 to 1969 was one of substantial economic expansion for the United States. Theannual growth rate of Gross National Product (GNP) was 4.5 per cent, compared with 3.2 per cent for theperiod 1950 to 1960 and 2.9 per cent for the period 1929 to 1950. GNP at constant (1958) prices increasedfrom $497.6 billion in 1960 to $725.6 billion in 1969, and per capita real personal income increased from$2,157 to $2,999 over the period. In certain circles of government, at least, this period of unbroken growthwas cause for enormous optimism, and was described as "a magnificent achievement. As a result, the generalquality and decency of life in the United States is incomparably greater than in years past" (Moynihan,

1973a, p.70).

Third, despite this general prosperity, or perhaps because of it, there was a renewed awareness of "theparadox of poverty amidst plenty". Part of this paradox was due to unemployment, for, despite unprecedentedlevels of economic activity, 1961 saw the highest rates of unemployment since the Depression. Between1958 and 1965 unemployment ranged between 5 per cent and 7 per cent of the labour force, and blackunemployment between 10 per cent and 12 per cent. The Civil Rights movement


11/175

2

of the early and middle 1960s also concentrated political attention on the black poor, for "the Sixties were atime of marches and militancy, of students and churches committing themselves to abolishing want, and of

documentary presentations of the nation's domestic shame by all the mass media" (Harrington, 1962, p.ix).

A number of official and unofficial studies contributed to this renewed awareness of poverty. One of themost influential was Harrington's The Other America (1962), in which he compared "the familiar America ....celebrated in speeches and advertised on television and in the magazines ... (with) the highest mass standardof living the world has ever known" to the other America, where he estimated forty to fifty million were poor(p.1). The poor were represented in part by the almost six million Americans, mainly black adults living inNorthern cities, who were not even enumerated in the 1960 Census: "their lives were so marginal - nopermanent address, no mail, no phone number, no regular job - that they did not even achieve the dignity ofbeing a statistic" (Harrington, 1962, p.xiii).

The 1964 Report to the President from the Council of Economic Advisors also emphasised that "the poorinhabit a world scarcely recognizable ... a world apart, whose inhabitants are isolated from the mainstream ofAmerican life and alienated from its values" (pp.55-56). A most important step in this renewed awareness ofpoverty was the development of "official" poverty lines by the Social Security Administration. The SocialSecurity Administration used the Department of Agriculture's Economy Food Plan as the core of its povertyindex. The Economy Food Plan specified required weekly quantities of foods in particular groups for anutritionally adequate diet for individuals of different age and sex, and published cost estimates of these dietsat U.S. average prices. The Social Security Administration defined the poverty line as income less than threetimes the cost of the Economy Food Plan, adapted for family size and farm - non-farm differences. TheEconomy Food Plan was seen as providing for a temporary, emergency diet that in January 1964 would cost22c per meal or $4.60 per person per week. The actual amounts of food suggested varied with the sex and

age of family members. For example, for men and teenage boys, the cost was higher, while for youngchildren and women, the cost was less. For all types of four-person, non-farm families averaged together, thepoverty line was $3,100 per year.

on the basis of this poverty line, Orshansky (1965, pp.3-29) calculated that in 1963, 7.2 million families and5 million individuals were poor, or that for 34.5 million persons "everyday living implied choosing betweenan adequate diet of the most economical sort and some other necessity, because there was not enough moneyto have both". In terms of the shape of poverty


12/175

3

in 1963, one half of all poor families had a working head, almost one third a head working full time. Non-white families were three times more likely to be in poverty than white families, but 70 per cent of the poor

were white. Female headed families were also three times more likely to be in poverty than male headedfamilies, but three quarters of poor families were headed by men. Fifteen million children under 18 and fivemillion persons over 65 were poor. Moreover, using a food plan that was only 20 per cent more generouswould lead to estimates of the population in poverty as numbering 50 million, or approximately one quarterof the U.S. population.

The main programs of the "War on Poverty" were instituted under the Economic Opportunity Act of 1964which established programs, such as the Job Corps and VISTA (Volunteers in Service to America), to beadministered by the new office of Economic Opportunity (OEO) within the Executive Office of thePresident. The early emphasis of the OEO was on community action programs, through which funds werechannelled directly to inner-city neighbourhoods. This strategy of "maximum feasible participation" of the

poor themselves was developed through federal support for the establishment of new services, public andprivate, offering the poor assistance and information about welfare benefits, federal sponsorship of litigationto challenge local laws and policies that denied them public assistance, and federal support of pressuregroups, such as the National Welfare Rights Organization (NWRO) which mounted public campaigns onbehalf of the poor. In 1964, the first year of the Economic Opportunity Act, $350 million was allocated tocommunity action programs. By 1967 the budget of OEO was $1.5 billion a year. Apart from thesecommunity action programs, the government sponsored a wide range of activities - youth developmentprojects to prevent and combat juvenile delinquency, mental health centres, remedial educational services,model neighbourhood projects of housing renovation and block renewal, and neighbourhood services centres,offering legal aid, medical clinics, housing advice and the like. General social welfare expenditure (coveringhealth, education and welfare) also increased from $52.2 billion (10.6 per cent of GNP and 38.0 per cent of

all government expenditures) in 1960, to $99.7 billion (12.9 per cent and 42.4 per cent respectively) in 1967,to $145.8 billion (15.3 per cent and 47.8 per cent respectively) in 1970, to $215.2 billion (55.3 per cent of allgovernment expenditures) in 1973 (Browning, 1975, p.16; and U.S. Department of Commerce, 1975, p.340).


13/175

4

The decision to undertake an income maintenance experiment was also influenced by a perceived "crisis inwelfare". The main components of this crisis were:

(i) an increase in the number of welfare recipients and in total program costs, without an apparentimpact on poverty;

(ii) a critical reaction to welfare aspects of the "War on Poverty"; and(iii) the continuing inadequacies of the public assistance system itself.

The United States income security system has a number of distinct components. The term "social security" ispopularly used to refer to the basic national social insurance program - old age, survivors, disability andhealth insurance (OASDHI). The cash benefits of this program are designed to replace, at least partially, the

income that is lost when a worker retires, becomes severely disabled or dies. The worker's entitlement tobenefits is based on past employment and the amount of cash benefits received is related to earnings incovered work - the more the worker earns, the greater, up to a ceiling, is his protection. The system iscontributory , coverage is compulsory, and while the benefits are not formally means tested there is a"retirement test" that effectively operates as an income test on earned income for those aged under 72 years.

Many industrial and commercial workers in private industry are covered by Unemployment Insurance, whichis available to unemployed workers who have demonstrated their attachment to the labour force by aspecified amount of recent work and/or earnings in covered employment. Unlike the other social insuranceprograms, which are administered by the Federal Government alone, the Unemployment Insurance system isa joint responsibility of the Federal and State governments. These insurance programs were established

nationally by the 1935 Social Security Act, in response to the Depression. Social insurance programs in theU.S. are very different to social security programs in Australia, or rather, the Australian system beingessentially selective-categorical with flat rate, income tested benefits and without an explicit insurancecomponent is different from the social security systems of all developed countries except New Zealand.Moreover, in the U.S., there is no system like Family Allowances of universal cash payments for children.


14/175

5

While there are tax concessions in respect of children, these do not assist the poorest families whose incomeis so low that they do not pay tax. There are also a variety of public assistance or "welfare" programs

available to people who do not meet the work-related eligibility requirements of the social insurance system.In the 1960s, the main welfare programs were Old Age Assistance (OAA), Aid to Families with DependentChildren (AFDC), Aid to the Blind (AB), and Aid to the Permanently and Totally Disabled (APTD), whichalso were established under the 1935 Social Security Act and involved matching Federal grants to the Statesfor money payments and social services for persons when they could not meet subsistence needs or specialneeds such as medical care. These benefits were means tested, and each State had considerable latitude indetermining how their programs would be organised and administered, who was eligible for assistance, andthe amount of the assistance payments. General Assistance (GA), which was financed solely by State andlocal funds, was also available for some needy people who were not eligible or whose needs were not fullymet under the Federally aided public assistance programs.* Partly because it is distinguished from the socialinsurance system, it appears that the U.S. public assistance system has more stigma attached to it than the

Australian social security system, which in other regards shares many of its features. In the U.S. the term"welfare" has pejorative overtones and concern with "welfare dependency" underlay many policy debates.

Despite continuing prosperity, and by 1965 falling unemployment, the number of welfare recipientscontinued to rise. Total expenditure on public assistance had risen from $3.8 billion in 1960 to $5.5 billion in1965, and reached $14.5 billion in 1970. Of the public assistance programs it was the Aid to Families withDependent Children (AFDC) program that experienced the greatest rise in the number of recipients. From 3.0million recipients in 1960, the level rose to 4.4 million in 1965, 6.0

* From January 1974, public assistance for the aged, blind and disabled became a Federal responsibility.

Benefits were increased, renamed the Supplemental Security Income (SSI) and administered by the SocialSecurity Administration. Under SSI, uniform eligibility standards apply from State to State, although thereare provisions for discretionary State supplementation to benefits. A further important development in the1970s was the growth of the Food Stamp program. The Food Stamps program has been a universal in-kindprogram for food - eligible families purchase coupons and use them like cash for most food items. Theprice a given family pays for coupons varies with its income and the value of the stamps varies withfamily size. In July 1974, legislation made food stamps available in all counties of the U.S. and to allpersons qualifying under the income test. For further details, see Plotnick and Skidmore (1975) andMacDonald (1977).


15/175

6

million in 1968 and 9.7 million by the end of the decade (U.S. Department of Commerce, 1975, p.356). Avery great part of the rise - and the rise was greatest after 1965 - was due to the "War on Poverty" itself,

which was intended to extend assistance to the eligible poor. The combination of liberalised eligibiity andincreasing numbers of those eligible actually applying for benefits was compounded by increasing numbersof broken families and by large scale migration from the South. Between 1940 and 1970 twenty millionAmericans left rural areas, most for the Northern cities. While the total number of AFDC families rose by107 per cent in the Sixties, in the major cities - New York, Philadelphia, Chicago, Detroit and Los Angeles -enrolment rose by 217 per cent (Piven and Cloward, 1971, pp.183-212). The increasing AFDC rolls were acause of alarm to certain commentators, as in most states AFDC was only payable to families without a malehead, and therefore the public assistance system could be characterised as contributing to the destruction ofthe family and to the rise of welfare dependency. "There is one unmistakeable lesson in American history: acommunity that allows a large number of young men to grow up in broken families dominated by women,never acquiring any stable relationship to male authority, never acquiring any rational expectations about the

future - that community asks for and gets chaos. Crime, violence, unrest, disorder ..." (Moynihan, 1973a,p.76).

Despite emotive characterisations, public assistance constituted a genuine problem to any Administration. AsSteiner noted, "Public assistance introduces problems of race, of sex, of religion, and of family relationships.It is hard to think of four areas most American politicans would rather avoid" (in Moynihan, 1973a, p.144).Increasing welfare caseloads and costs highlighted the need for welfare reform. The public welfare systemwas the only national program designed to provide income support exclusively to the poor, and yet it coveredonly about one quarter of the poor, or 7.25 million of the 29.7 million still poor in 1966. The patchwork ofprograms resulted in inequities between categories of assistance and particularly between States. In 1965, theaverage monthly payment per recipient was $31.65 under General Assistance, $32.85 under AFDC, $66.50

under Aid to the Permanently and Totally Disabled, $81.35 under Aid to the Blind, and $63.10 under OldAge Assistance. As well, the 1965 AFDC average monthly payment per recipient was $32.85 nationwide, butranged from $8.36 per recipient in Mississippi to $51.39 in New Jersey. Even Old Age Assistance, with anational yearly average payment of $941, ranged from $492 per person in Mississippi to $1,333 inWisconsin.

Variations of this order were seen to provide incentives for migration from low payment States to highpayment States, and


16/175

7

produced pressure for residential requirements for State welfare. In 29 States, eligibility for AFDC wasspecifically tied to the absence of a male head. This requirement was seen as an incentive to family

breakdown. Most public assistance payments were subject to a 100 per cent reduction rate - for every $1earned in work, assistance was reduced by $1. The combination of such income tests on public assistance andon, say, Medicaid and Food Stamps, may have resulted in effective marginal tax rates of over 100 per cent,which in turn may have lead to significant work disincentives. As well, the varying payment levels werecompounded by complex and discretionary regulations, with the consequent suspicion that eligibility wasarbitrarily determined in many cases. Community pressure to hold down costs and to police welfare fraudwas seen as so burdening social workers that little opportunity was left for remedial casework. Tobin et al.(1967, p.1) felt that "administration of public assistance is now largely a matter of policing the behaviour ofthe poor to prevent them from 'cheating' the taxpayers, rather than a program for helping them improve theireconomic status through their own efforts". Finally, the operation of the public assistance system wasperceived to stigmatise the poor who, as is clear from the above discussion, were expected by some to cheat

the system, give up work, become dependent on welfare or break up their families.

While the Department of Health, Education, and Welfare (HEW) was responsible for these public assistanceprograms, the OEO was responsible for anti-poverty policy. Within the OEO, the Office of Research, Plans,Programs and Evaluation (RPP&E) considered strategies for improving income maintenance. It wasconsidered that an improved income maintenance system should raise the incomes of the poor, narrow Statedisparities, reduce inequities between benefit categories, increase work incentives, reduce stigma andimprove family stability. The choices appeared to be between reform of the existing welfare system, achildren's or family allowance system, or a negative income tax.

1.2 Negative Income Taxation

A negative income tax (NIT) is one form of guaranteed minimum income (GMI). Discussion of GMIs hasbecome difficult because the term has come to mean different things to different people, and proposals ofvastly different scope and payment level have been grouped under the same rubric even though they are notalternative means of solving the same problems (Marmor, 1971, p-83). In particular, terms used in the UnitedStates in the 1960s have been used in Australia in the 1970s to describe quite different income supportschemes.

The term "guaranteed minimum income" is used here to refer to programs which have the common objectiveof providing the persons to whom they relate with a basic level of income support. All


17/175

8

GMIs employ three basic variables - an income guarantee, a withdrawal rate * applied against a "tax base",and a break-even level of income where net payments become zero. The relationship between these variables

is such that any two determine the third.

Figure 1 illustrates these essential elements of a GMI by comparing the disposable income (DY) after tax andcash transfers to the corresponding private income (Y) before tax and transfers.

The line OAB shows the relationship between DY and Y under usual taxation arrangements. After startingfrom the origin with a slope of one, since no tax is paid below the income tax threshold of Ye, OAB takes onsuccessively lower slopes as income increases and progressively higher tax rates apply. The total tax is thevertical distance between OAB and the 45 degree line. A GMI would substitute the relationship CAB forOAB. If a person's income is above the tax threshold, Ye, tax is paid as usual. Below ye individuals will havea larger disposable income than they did before; the line CA is higher than OA. Those with no private

income would receive the income guarantee of OC. Those with income below Ye

would receive somebenefits. Thus Ye is the break-even level and the slope of the line CA is the income retention rate, which isthe complement of the withdrawal rate.

This simple and general form of GMI can be varied according to the level of the guarantee and thewithdrawal rate, the breakeven level that is considered desirable, the taxation and income securityarrangements that the GMI is integrated with or supersedes, or the eligibility criteria that are imposed.Consequently a GMI can be of four broad types:-

(i) an income tested, categorical scheme;(ii) a social dividend or demogrant;(iii) a tax credit scheme;(iv) a negative income tax.

Under the definition used above, selective-categorical payments such as AFDC in the U.S. or, say, AgePensions in Australia are a form of GMI - they provide an income guarantee to eligible persons in selectedpopulation categories. An income or means test is applied so that as private income increases the guaranteeor benefit is withdrawn until the break-even level is reached when no assistance is provided.

*In this paper, the terms "withdrawal rate", "benefit reduction rate" and "negative tax rate" are usedinterchangeably.


18/175


19/175

10

However, the term "guaranteed minimum income" has commonly been envisaged as referring to programswhich, through an integration of the taxation and income security systems, potentially provide support to allrather than part of the population, and with low income as the only criterion for assistance. For example,

under a social dividend scheme, a demogrant is paid to all income units, regardless of income level, and thepayment is not offset against positive tax. Families with no independent incomes would receive only thesocial dividend, which would be their guaranteed income, and they would pay no tax. All families withprivate income would receive the full social dividend, and would pay tax, which could be less, equal to ormore than the dividend received. A demogrant scheme was proposed by Senator McGovern in the U.S.Presidential campaign in 1972. Family Allowances in Australia are also a form of social dividend.

In a tax credit scheme, positive tax is applied at all levels of private income, but each taxpayer is allowed acredit to be deducted from that tax. The size of the credit would depend on the number of dependants thetaxpayer had, but not on his private income. At low levels of private income, the tax credit would exceedpositive tax payable and a transfer payment would be made from the Government to the taxpayer. At the

break-even level, the positive tax would equal the tax credit, and no payment would be made, nor would anytax be payable. Above the break-even level, the positive tax would exceed the tax credit, and the taxpayerwould start to pay tax. A distinguishing feature of the tax credit scheme, in comparison with a socialdividend, is that the taxpayer receives or pays only the net amount.

Negative income taxation (NIT) involves the use of the tax system to pay income subsidies that would closesome portion of the "poverty gap", i.e. the difference between an individual's or family's private income andthe income they would need in order not to be officially defined as poor, or some proportion of the differencebetween private income and unused personal tax exemptions plus minimum standard deductions. In thissituation the income guarantee is the amount received when preallowance income is zero; the tax base is thedifference between the level of actual income and some standard, either the family's poverty line or unused

exemptions and deductions; the negative tax rate or withdrawal rate is the proportion of this difference that ispaid out.

There is some difficulty in distinguishing a negative income tax from a tax credit, and these two terms inparticular have often been confused or used interchangeably. One usual distinction is that tax credits areintegrated with the tax system and all income units face a standard rate of tax (perhaps with a surtax at higherincome levels), while under a NIT those receiving assistance face a higher rate of tax until they exceed


20/175

11

the break-even level, where they are subject to standard positive tax rates. In this sense, a NIT is littledifferent from pre-existing welfare provisions except that it may apply to all income units rather than thosewho satisfy categorical eligibility requirements. As well, tax credits are often envisaged as providing only a

supplement to income rather than a minimum level for adequate support. For instance, in 1972 the BritishGovernment considered a child tax credit that would have provided a supplement to income for families withchildren, and Canada introduced a similar child tax credit in 1979. On the other hand the Priorities ReviewStaff recommended an Australian tax credit scheme that would have provided payments sufficient for peopleto live on.

All these forms of GMI could be constructed to have the same net results for the individuals and familiesinvolved. The choice between the various broad types of GMI may therefore depend on the balance achievedbetween objectives, design and impact. Indeed, all income support schemes involve some tradeoffs betweendifferent objectives and, consequently, different design features. For instance, a social dividend will involve amuch greater volume of income flows between families and the Government, in the form of flat demogrants

and higher income taxes, than will a tax credit or a NIT. This may be considered a disadvantage, but paymentof a social dividend will also ensure that all families have a regular and stable source of income. Again, thetotal budgetary cost (i.e. the cost of the net assistance provided to those below the break-even point) is likelyto be a significant factor in assessing whether a particular scheme should be introduced. That cost will be afunction of the level of net payments and the number of persons eligible for such payments, which in turnwill be determined by the guarantee level, the withdrawal rate and the shape of the income distribution withinsociety. In order to ensure adequacy of payments to the poor it would be desirable to have a high guaranteelevel. In order to ensure that people are not discouraged from providing for themselves, it would be desirableto have a low withdrawal rate. But a high guarantee level and a low withdrawal rate are incompatible with alow break-even point, and consequently the number of people receiving benefits would be greatly increased,as would the overall cost. Moreover, there will also be a leakage of benefits to people who are not judged to

be poor. To make payments to people who are not poor will mean, within given budgetary constraints, thatthe effective level of the guarantee will be reduced, thus disadvantaging those with very low private income.

Marmor (1971, pp.86-90) has suggested a number of criteria for assessing various income maintenancealternatives. These are:-


21/175

12

(i) Adequacy - what portion of the "poverty gap", either in aggregate or for individuals, is closedby the proposal?

(ii) Stigma - what degree of stigma is associated with the source, form and administration of theproposal, and what effect does this have on take-up?

(iii) Equitable Efficiency - what proportion of the benefits of a program go to the non-poor as wellas the poor (vertical efficiency)? What proportion of the poor or other target groups receive theintended benefits (horizontal efficiency)?

(iv) Incentive Effects - what effects will the plan have on work, saving and investment, family sizeand composition, economic growth and national productivity?

(v) Program Costs - what are the total expenditures at all levels of government, taking into accountsavings in other federal, state and local programs, tax "clawbacks", and costs due to changedwork behaviour?

(vi) Political Support - what is the nature and extent of approval for a given program, among thepublic, the administration and the legislature?

It was issues of this type that U.S. researchers and policy makers took into account when considering anti-poverty programs and welfare reform proposals. By the mid 1960s the negative income tax had become thepreferred strategy for reform.

Discussion of negative income taxation in the United States is conventionally dated from Friedman'sCapitalism and Freedom (1962,pp.190-195), although it was not until a later series of articles (1966,1968a,1968b) that he proposed a specific NIT plan to replace existing U.S. public assistance provisions. In 1966, afamily of four persons (husband, wife and two dependants) was entitled to personal income tax exemptionsand minimum deductions of $3,000. If such a family had a private income of $3,000, its exemptions anddeductions just offset its income - it had a zero taxable income and paid no tax. If the family had an incomeof $4,000, it had a positive taxable income of $1,000 and was required to pay a tax of 14.0 per cent, leaving itwith a disposable income of $3,860. If family income was $2,000, it could be said to have a negative taxableincome of $1,000, the difference between minimum standard exemptions and deductions and private income.Under the existing system, this negative taxable income was disregarded. Friedman proposed that families beentitled to receive 50 per cent of this difference, thus giving families with $2,000 private income a further$500, and a total disposable income of $2,500. If


22/175

13

a family had no private income, it would be entitled to receive 50 per cent of $3,000. This $1,500 would bethe income guarantee, which would be reduced by the 50 per cent withdrawal rate applied against the "tax

base" (exemptions and deductions minus private income) until at $3,000 the break-even level would bereached and no NIT payments would be made.

Support for the negative income tax concept involved the observation that such a provision would make thetax system symmetrical. For instance, the positive income tax system allows the government to share in someportion of a family's earnings when they exceed a certain minimum defined by exemptions and deductions.In a negative income tax system, the government, by providing benefits, shares in the shortfall of familyincome below some minimum, not necessarily defined in the same way. Support for the NIT concept mayhave been more strongly influenced by considerations of equity. The poor, and in particular those whoseincomes were so low that they were not taxable, could not share fully in the benefits of the then currentincome tax exemptions and deductions. Families of different sizes and with the same (non-taxable) income

paid the same amount of income tax - none - and this was seen as an inequitable treatment of families'differing needs.

Part of the attraction of the NIT was ideological. Lampman (1976,p.xii) saw negative income taxation as anotion "congruent with the proposition that poverty is merely lack of money. It competed with the notion thatthe poor needed sympathetic counselling, job training and public service employment or in-kind transferssuch as food stamps, medical care and housing". Indeed, as a "market oriented solution to the welfareproblem", a NIT would be "consonant with the country's traditions" (Hildebrand, 1967, p.145). In a certainsense, negative income taxation was the economists' way of fighting poverty. Yet, a remarkable feature of theNIT was its attractiveness across the political spectrum, partly because negative taxation represented both alimitation on the intrusion of government welfare programs into individual freedoms and an expansion of the

principles of universal income security.

A continuing theme has been that a guaranteed minimum income would be a necessary response totechnological change - to the "next step in socioeconomic evolution", when work would be redundant and thelink between work and the distribution of income would be broken (Theobald, 1967). However, the mostimportant source of support for a NIT was its perceived superiority as an anti-poverty strategy. The basis ofthe transfer was pre-NIT income and family size, thus avoiding the categorisations in existing socialinsurance and welfare programs. It was felt that this system could avoid inequities between categories ofpublic assistance and reduce the stigma associated with receipt of welfare. An income security program


23/175

14

based on need and adjusted for family size would provide assistance to all the poor, regardless of the reasonsfor their poverty, something the public assistance and social insurance systems did not. The tax system, being

a national system, would solve the problem of vastly differing levels of welfare between States and thusreduce incentives for internal migration. No negative income tax envisaged had a reduction rate as high as100 per cent, as did public assistance. A NIT should provide greater work incentives than welfare.

On balance, the advantages of a NIT seemed greater than those of alternatives such as family allowances orreform of the existing welfare system. For example, in 1968 a child allowance scheme was proposed thatwould have provided a universal benefit of $600 per child per annum, the elimination of tax exemptions forchildren, and a special tax to decrease net benefits as income increased (Brazer, 1968, p.142). This approachwas rejected primarily because of its perceived lack of "efficiency". According to Moynihan (1973b,pp.49-50), the family allowances strategy was rejected because it made no distinction between the poor and thenon-poor, and because it was judged to be a "baby bonus" rather than an anti-poverty device. At the same

time, one of the best known proposals to reform the existing welfare system was the "Nathan plan", whichwould have decreased State variations in benefit levels through a national minimum standard for existingcategories of public assistance, to be administered by the existing Federal-State welfare apparatus (Marmor,1971, pp.90-92). This proposal would have preserved many of the inequities of the public assistance system.A more thoroughgoing reform seemed desirable, even though that favoured, a NIT, was not withoutdifficulties.

Figure 2, opposite, derived from Tobin et al. (1967, pp.4-7, 23-27) illustrates in more detail the problemsfaced in designing a NIT and the factors that U.S. policy makers had to take account of in consideringalternative NIT plans. The example is of a High (H) schedule plan which would guarantee allowances thatapproach the poverty line. The offsetting tax rate would be 50 per cent, compared with the 100 per cent

operating under U.S. public assistance programs. A four person family under this schedule would receive$2,600 - $800 each per adult and $500 for each child. Figure 2 compares the disposable income (DY) aftertax and allowance to the corresponding income (Y) before tax or allowance. The line OAB shows therelationship between DY and Y under the tax laws operating in the U.S. in the early 1960s. After startingfrom the origin with a slope of one since four person families with incomes below $3,000 paid no tax, OABtakes on successively lower slopes as income increases and progressively higher tax rates apply.


24/175


25/175

16

The H-50 schedule plan would substitute the relationship CDB for OAB. Below Y of $6,144 families willhave larger disposable incomes than they did before; the line CD is higher than the corresponding segment of

OAB. Those with no income would get an allowance of $2,600. Those with incomes below the break-evenlevel of $5,200 would receive cash benefits, whereas those families whose income had been between $3,000and $5,200 would have paid tax previously. The plan illustrated is also designed to provide lower tax forfamilies with incomes between $5,200 and $6,144. The plan includes those families with incomes higherthan the break-even level of $5,200 in order to avoid confiscatory marginal tax rates. The schedule wipes outall tax payments on incomes below $5,200, but if the prior tax rates were to apply to all incomes above$5,200, then a 4 person family with an income of $5,201 would pay a tax of $32, leaving it with a disposableincome of $5,169. The plan avoids this problem by giving the family the option to stay under the NIT systemuntil its disposable income is exactly the same under the positive and negative income tax; in this case the"tax breakeven" income would be $6,144. Such "notches" need always be taken into account in considerationof NIT plans. An important criterion for assessing a NIT is whether it would treat the poor and the near-poor

equitably. Of course, reducing tax rates for the near-poor would increase the overall cost of a NIT.

Tobin et al., (1967,pp.23-27) estimated the cost of the NIT illustrated for the U.S. in 1967 as $26 billion, ofwhich $18.2 billion would have gone to those with incomes below $3,000, $6.7 billion to those with incomesbetween $3,000 and $5,200 and $1.1 billion to those with incomes between $5,200 and $6,144. Incomparison, it was also estimated that a NIT with the same guarantee levels, but a tax rate of 33.3 per centwould have cost $49.3 billion. An alternative schedule, where the guarantee would have been $1,600 for afamily of four and with a 50 per cent tax rate, would have cost $7 billion. Given that total U.S. social welfareexpenditures (including education, health, social security, and public assistance) in 1967 had been $99.7billion, and expenditure on public assistance around $6 billion, it would seem quixotic to consider a highschedule - 33.3 per cent tax rate plan that would cost around $50 billion. Moreover, Browning (1975, p.4)

estimated that since only a part of net national product is available as a tax base to finance redistributiveprograms, that for every 1 per cent of net national product to be redistributed, marginal tax rates for allfamilies would need to be increased by 5 per cent. In a further example, Green and Lampman (1967, pp.125-126) describe a plan that in 1964 would have been sufficient to guarantee every individual and family in theU.S. an income in excess of the poverty line. The net cost of the plan would have been determined by the taxrate, in this case 33.3 per cent. The combination of a high guarantee and a low tax rate would have resulted ina very high break-even level of $9,000. In 1964, 68 per cent of all families and


26/175

17

individuals in the U.S. would have been eligible to receive some payments. As a result the plan would havehad a gross cost of $155 billion; of this, $51 billion would actually have been redistributed, and of this net

cost, $28 billion would have gone to the non-poor.

Such costs would appear to make this NIT impractical. It is important to note, however, that a NIT or otherincome security payments do not necessarily imply an expansion of the government sector at the expense ofthe private sector. Payment of cash benefits does not involve the government in either the production ofgoods and services or expenditure upon goods and services. Transfer payments increase the purchasingpower of private households - the money is spent on private goods which are privately consumed. Thegrowth of the "welfare state" means a growth in the ratio of taxes to national income, but it does notnecessarily involve an increase in the size of the public sector (Samuelson, Hancock and Wallace, 1970, p-162), apart from the costs involved in administering transfer programs. But concern might still be expressedwith the behavioural impact of increased taxes and the guarantee of a minimum income.

Within OEO, discussion of NIT proposals centred on the issues of cost effectiveness, of total cost and ofdirecting assistance to those most in need. Among political decision makers there was concern with the effecton labour supply of extending cash assistance to the working poor. This was the subject of debate andcontroversy as substantial reductions in labour supply could significantly increase the cost of a negativeincome tax scheme. For example, would large numbers of people above the break-even level decrease theirhours of work so as to become eligible for payments or would some give up work entirely, in order to live onthe guarantee? A high withdrawal rate raises the additional concern that those on low wages would be littlerewarded for their work effort. Those who had been unemployed or sick might not be encouraged to rejointhe workforce especially if their usual work was unpleasant or if the cost of looking for work was high, or ifthey felt that looking after their children, say, was more rewarding. Decreases in labour supply, by decreasing

pre-allowance income, could increase the number of persons eligible for a NIT and increase the amountspayable. Not only would the cost of a NIT scheme itself be affected by reductions in labour supply, but thesocial, non-budgetary cost in lost production could be substantial. As well, if a NIT reduced work incentivesthe anti-poverty objectives of the scheme would be undermined by weakened labour market ties and reducedearned income.

An implicit concern was with the social and political acceptability of such assistance. Indeed, the reasonfamilies headed by men had generally been excluded from public assistance was precisely the fear ofimpairing their incentive to work


27/175

19

a normal good - as income increases, demand for leisure increases. Therefore, it is expected that increasedincome will be divided in some manner between increased purchases of both more market goods and more

leisure. Since increased leisure is equivalent to decreased labour supply, this income effect is expected to benegative in that it tends to bring about changes in labour supply in the opposite direction to changes in thewage rate.

Changes in social attitudes or the flexibility of working hours, for example, could lead to quite dramaticchanges in the patterns of labour supply response. Such changes are not separately specified in this analysis.Some exogenous influences can, however, be taken into account, including the impact of government incometaxes and transfer payments. In the case of a GMI or a NIT, the changes in economic incentives are derivedfrom the guarantee and the withdrawal rate. As indicated above, any guarantee will increase income andwould be expected to have a negative income effect, thus reducing labour supply. Although an individual'sguarantee will be reduced as hours of work increase, this change is caused by the withdrawal rate rather than

the guarantee itself. Therefore, it is assumed that the guarantee has no substitution effect. In the case of thewithdrawal rate, changes can be viewed as changes in the wage rate, so that higher withdrawal rates areequivalent to lower net wage rates. Therefore, the positive substitution effect would be expected to result in adecline in labour supply. The income effect of the lower net wage rate would be expected to work in theopposite direction, with people attempting to increase their labour supply in order to restore their previousincomes. Therefore, under a guaranteed income there will be an income effect due to the guarantee that willtend to reduce labour supply, a substitution effect due to the withdrawal rate that will also tend to reducelabour supply, and an income effect due to the withdrawal rate that will tend to increase labour supply. Inaggregate, however, the withdrawal rate can only serve to decrease the effective guarantee, so that thenegative income effect of the net transfer must dominate. In theory, there is an unambiguous workdisincentive under a GMI.

Figure 3 overleaf illustrates some of these theoretical assumptions, through the example of a hypotheticalworker capable of earning $2 an hour. For simplicity it is assumed that all hours worked are paid at thisordinary time rate. At $2 an hour, the worker can choose to be situated anywhere on the line OA (his"opportunity set"), but initially the worker is in equilibrium at point X, where he works forty hours a weekand receives a weekly income of $80. Sets of indifference curves can be drawn, each representing a series ofbundles of income and of hours of work between which the worker is indifferent,


28/175


29/175

21

i.e. his enjoyment of the possible combinations of work and income is the same at all points along any onecurve. But given a wage rate of 72 an hour, the worker can only achieve the level of enjoyment represented

by indifference curve Io, and only at point X. He is then offered a negative income tax plan that, in thisexample, offers him $60 a week if he has no earned income and has a withdrawal rate of 50 per cent, giving abreak-even point C with a total earned income of $120 per week. To the left of this point C, the workerreceives no payments. The opportunity set now facing the worker is BCA rather than OA, and he choosespoint Z on indifference curve Il where his hours of work and earned income have decreased, and his totalincome has increased. The increase in total income is measured by the vertical distance between X and Z,and the decrease in hours worked is measured by the horizontal distance between X and Z.

In this example the reduction in hours of work from X to Z can be divided into an income effect and asubstitution effect by drawing line DE parallel to AO and tangential to the higher indifference curve I1, at Y.Since DE is parallel to AO, the slopes of the lines (i.e. the wage rates) are the same at all points along both

lines. The distance DO between these parallel lines therefore shows the payment that would yield as muchsatisfaction as the original negative income tax plan if the withdrawal rate were zero. The horizontal distancefrom X to Y is the net income effect of the guarantee and the tax on hours worked, since the wage rate or theprice of leisure is the same at both points. The horizontal distance from Y to Z is a measure of the puresubstitution effect of the tax rate only, since the level of satisfaction is the same at both points. A guaranteeof $60 a week with no tax would enable the worker to reach an indifference curve lying above I1. Insummary, as Figure 3 is drawn, both the income effect of the guarantee and the substitution effect of thewithdrawal rate will tend to reduce the amount of work supplied, and will outweigh the income effect of thewithdrawal rate. Figure 3 illustrates only one specification of a negative income tax plan. The generalexpectation from theory is that plans with higher tax rates would have larger substitution effects,but alsolarger income effects. Similarly, it would be expected that the plans with the most generous payments would

cause the largest reductions in labour supply. It would also be possible to consider the impact of changes infamily income on the labour supplied by an individual member of a family unit if the family were thought ofas a single decision making unit having a collective indifference map.

However, the theory described above is too simple in a number of significant ways. The conventionalanalysis is essentially static, so that, for example, the long run acquisition of skills and the process ofadjustment from one equilibrium to another are not considered. As a result it is assumed that individuals


30/175

22

offered a negative income tax plan will have complete understanding of the tax system and will makeinstantaneous and costless adjustments to their new equilibrium level of labour supply. The static theory

should be modified by taking account of a number of dynamic considerations. The theory assumes that thewage rate confronting each worker is exogenously given. It can be argued that a worker may change hismarket wage in at least three different ways. First, he might temporarily reduce his hours in order toundertake training that would increase his wage at some future time. Negative income tax payments mightmake this easier through providing an income during the period of training. Second, such payments mightinfluence the length of time taken for job search. Third, such payments might lead to the substitution of moreagreeable though lower paid work for disagreeable work rather than the substitution of leisure for labour.Thus earnings would fall more than hours of work. Similarly, a guaranteed income could produce a shift toworking no overtime or to working part-time, which would change effective wage rates.

The model could also be expanded to take account of "unpaid work", such as home production and services

and educational activity. Mincer (1962) showed that extra income may be used to purchase labour savingappliances, home help or convenience foods, and as a result, when income increases, unpaid work may bereduced rather than paid work. Becker (1965, pp.495-517) has argued that unpaid work should not beconsidered simply as a commodity for consumption, but that its value can be measured in terms of time, andthe consequent forgone income.

Consideration of these factors is particularly important when analysing the labour supply behaviour ofmarried women and teenagers (Edwards, 1980, pp. 6-9). A further factor that needs to be taken into accountis the influence of preference differences. In contrast to the simple consumption theory outlined above, itmay be useful to distinguish among three general "goods" - leisure, current market goods consumption, andasset accumulation. Greenberg and Kosters (1973, pp. 19-22) argue that preference for savings relative to

leisure results in a systematic relationship between levels of non-employment income and work effort thatmust be taken into account in estimating income effects. Income generated from accumulated savings wouldtend to depress labour supply, but there would also be a preference-induced tendency for high levels of workeffort. Greenberg and Kosters conclude, interestingly, that "neglecting the influence of preference differencesmay lead to empirical results that fail to conform to the predictions of theory".

Broader objections may be made to this approach to work incentives, and it may be argued that this model oflabour supply behaviour is not realistic. Economic theory does not separately


31/175

23

specify and take into account sociological aspects of commitment to work. Cohn (1979, p.264) has noted that"the assumption that man works for reasons other than income is a cornerstone of the sociology of work.

Several early writers ... considered the need to work a basic instinct of man. Maslow (1954) emphasized theimportance of work in the process of 'self-actualization' and the development of self-esteem .... Earlytheorists focused on the non-social aspects of the need for steady activity and the expression of bothcreativity and productivity". That is, just as all unpaid work should not be considered as yielding onlysatisfaction and no income, all paid work should not be considered as yielding only income and nosatisfaction. Changes in sociological and social-psychological factors are equivalent to exogenous shifts inthe static relationships in the above economic analysis and may operate to confound the predictions of thework-leisure choice hypothesis. For instance, if work has greater value than leisure (i.e. leisure is a "bad"),the indifference curves as shown in Figure 3 may no longer be of the conventional downwards-sloping,convex shape, but might slope upwards, or the individual might have multi-dimensional preferenceorderings. As long as the need for income dominated, a worker may behave as indicated in Figure 3, but at

higher levels of income, the individual could switch to an unconventional indifference map (Lutz, 1980, pp.505-516). Attitudinal variables that are usually not separately specified in econometric models includevarious unmeasured traits affecting wages, income, and labour supply, e.g. quality of education, training,work experience, mental and physical health, and personal traits such as ambition, a desire to retire incomfort or to leave abundant material goods to one's heirs, or dislike of spending time at home. Incomemaintenance researchers have noted that sociological literature has not developed a conceptual approach thatwould allow empirically based predictions about the effects of attitudinal variables on labour supply in theNIT context. Methodologically weak social-psychological variables and relatively low reliabilities ofresulting scales have not assisted the consideration of attitudinal factors in labour supply theory (Wright,1977, pp.341-342).

1.4 Social Experimentation

The above discussion of the theoretical model of labour supply indicates that there could rarely be anunambiguous prediction of the quantitative effect of the introduction of a negative income tax. Even whenthere is a clear prediction as to the direction of the change in the supply of work effort, no precise measure ofthis change can be provided. Policy makers required accurate information about the likely labour supplyeffects of a NIT. For instance, a 10 per cent reduction in work effort overall could imply either that allworkers reduced their hours


32/175

24

by 10 per cent, or that 10 per cent gave up work altogether, or some permutation of these. The precise natureof the labour supply response would be likely to have a significant impact on the political acceptability of a

NIT plan. Accurate estimates of labour supply effects were required. Alternative sources of such estimatesincluded sample surveys, econometric studies and social experiments.

Empirical studies of the disincentive effects of taxation have been available since the 1940s. These studiescovered a wide range - Sander had investigated the influence of tax rates on 160 American executives;Davidson concentrated on a much smaller sample of doctors; the Report of the U.K. Royal Commission onthe Taxation of Profits and Income had dealt with a large sample of workers who had some opportunity tovary their labour supply in response to changes in income tax; Break surveyed some 300 self employedaccountants and solicitors; other studies looked at the effects of the PAYE method of tax collection, andattitudes to work, and beliefs about the tax system. In general these studies showed many similarities in theirfindings. There was no clear evidence of marked disincentive effects associated with tax increases, and there

was some evidence that there were both incentive and disincentive effects for small groups which byoffsetting each other, tended to reduce the net tax effect on aggregate labour supply (O.E.C.D., 1975, pp.29-51).

There are a number of problems associated with such approaches to determining work disincentives. Theprimary problem with these studies was their lack of generality. Some were of very small samples, and inmany there was a tendency to concentrate on executives and professionals, rather than on the whole labourforce or even the poor. Moreover, studies in the U.K. or other countries in the 1950s could be considered oflittle relevance to the situation of the U.S. in the 1960s. As well, people may not possess accurate knowledgeof the tax system, so that their responses in such interviews may not reflect what they actually would do in areal situation once their misconceptions had been removed. In survey work it is usually not possible to

untangle the effects of tax alone from other factors such as the rate of inflation. Interviewees cannot beexpected to operate like regression models precisely measuring the partial effects of each of a host ofvariables. Of course, it should be noted that such studies provided evidence only about the effect on workincentives of changes in positive tax rates and were not specifically relevant to the negative income taxapproach under consideration by the Office of Economic Opportunity. Their policy relevance was thereforelimited.


33/175

25

Econometric studies of labour supply involve the specification of the relationships betwen economicvariables, the collection of data which can be used in the estimation of the parameters of these relationships,

and finally the application of some statistical technique to obtain numerical values for these parameters. Inthe investigation of work incentives, it is necessary to specify labour supply equations, obtain empiricalcounterparts to the variables used in these equations and choose an estimation method. Having estimated alabour supply function, a researcher can proceed to analyse the effect of the negative income tax byevaluating the estimated function at the pre-tax and post-tax levels of the relevant explanatory variables.Such simulations can assist the policy maker by providing information about the various combinations ofwork disincentives, number of recipients, budget cost, and the extent of income redistribution offered by NITplans under consideration.

There were many econometric studies available to researchers and policy makers in the Office of EconomicOpportunity. These studies were based upon labour market experience in the U.S.A. and employed such data

sources as the 0.1 per cent sample of the 1960 U.S. Census, the 1967 Survey of Economic Opportunity andthe Current Population Survey of the U.S. Bureau of the Census. Because variations in the choice ofexplanatory variables, parametric representation, data, or estimation method led to variations in a study's finalresults and its policy implications, the U.S. econometric studies produced widely differing estimates ofincome and substitution effects. The wide variations in the estimates suggest that the results of such studiesshould be treated with caution. The main contribution of such studies may be in the process of refiningeconometric models and simulation methodology. Moreoever, even if there was general agreement on thesetechnical matters, the relevance of these econometric studies would still be open to question. As discussedpreviously, the conventional theoretical analysis of labour supply contains several crucial assumptions andover-simplifications, and is essentially static. The data sources are cross-sectional, not longitudinal.Description of dynamic adjustment to NIT changes is limited in such models.

As Katz and Jackson (1978, p.201) have noted, "It becomes important then, particularly in a period whenbudgetary funds are restricted, to thoroughly research the impact of any new ... schemes, to establish whichof the policy objectives will be met in practice, which will not, and to discover any unintended side effectsthat may arise". That is, in order to know how people actually respond to a specific program it is necessary toset that program up and observe its effects.


34/175

26

Social experimentation attempts just that. It seeks to measure the effects of changes in policy variables byapplying these changes to human populations in conditions of controlled experimentation similar to those

used in the physical and biological sciences. In a social experiment, one or more treatments (programs, NITplans, etc.) are administered to some set of persons or other units drawn at random from a specifiedpopulation. Observations (or measurements ) are made to learn how or by how much some relevant aspect oftheir behaviour following treatment differs from like behaviour on the part of an untreated control group alsodrawn at random from the same population (Riecken and Boruch, 1974, p.3).

Such experiments have been common in psychology; for instance, experiments with teaching practices ineducation, and studies of the effectiveness of advertising. The distinguishing feature of the socialexperiments under consideration is time - changes in behaviour over a considerable period were studied.Examples of new, large scale social experiments in the United States, apart from the negative income taxexperiments, include:-

(i) supported work experiments, testing whether people who traditionally are hard to employ canbe trained both technically and psychologically for employment;

(ii) health insurance experiments, studying how the demand for medical care changes as the cost ofcare is reduced;

(iii) electricity rate experiments, seeking to measure the response of residential users to variations inthe rate of electricity charges; and

(iv) experimental housing allowance programs, encompassing demand, supply, and administrativeexperiments, and considering the possible effects of a national program of cash housingallowance.

Rivlin (1974, pp.346-354) has classified social experiments into four types by the kind of response beingmeasured - the response by "micro-units" (e.g. the income maintenance experiments), the response by"macro-units" (such as market response in the housing allowance experiments), the change in the productionfunction of some public service, and the response to a particular type of service. It may be more usefulhowever simply to classify experiments by whether direct response effects are sought on the householdsupply side, the household demand side, or from the institutions providing the service (Ferber and Hirsch,1978, p. 1389).


35/175

27

Social experimentation is oriented towards public policy and usually a specific government program. Interestin the concept of social experimentation had grown out of the "quiet revolution" in planning of the early

Sixties. This involved a commitment to measuring social needs and evaluating social programs, and wasembodied in the Planning-Programming-Budgeting System (PPBS) introduced into the Department ofDefence in 1961. By 1967-68, evaluation of social programs had become an interest of the office of AssistantSecretary for Planning and Evaluation in HEW, and the Office of Research, Plans, Programs and Evaluation(RPP&E) in OEO. In these agencies social experimentation was seen as a new and potentially effective toolof evaluation.

The advantages claimed for the experimental approach are substantial. Non-experimental analyses of humanbehaviour may suffer from lack of relevant data and are influenced by uncontrolled or uncontrollable factors.The results can be no more than correlational. It is asserted that a properly designed social experiment canproduce inferences of superior dependability about cause and effect. A social experiment is the best method

of distinguishing policy effects from non-policy factors such as social and economic developments that mayaffect the entire population. Random selection of sites and participants, random allocation of participantsbetween experimental and control groups, and the application of advanced statistical methods, such asmultiple regression analysis, will ensure that any differences in behaviour between the experimental groupand the control group can be accurately attributed to the policy being tested. As well, the nature of anexperiment focuses the attention of researchers and policy makers on theory and on program design. Like ademonstration project, a social experiment constitutes a testing of a program's operational feasibility, andsupplies information on the administrative aspects of policies. This practical orientation can provideunanticipated lessons for future program staff. A final advantage sometimes claimed for socialexperimentation is that some issues may be removed from political controversy into the supposedly neutralzone of scientific analysis.


36/175

28

There are a number of problems associated with the use of social experimentation in public policy,particularly in regard to:-

(i) cost;(ii) technical aspects of experimental design and operation;(iii) policy relevance; and(iv) ethical issues.

Cost is a major consideration in experimentation, and account must be taken of the number of staff on aproject, the extensiveness and frequency of data collection, the cost of administering the treatments, the cost

of the treatments themselves, e.g. negative income tax payments or housing vouchers, and the duration of theexperiment. For instance, the U.S. Housing Allowance experiments are estimated to have cost around $200million. Such costs may still be moderate in relation to the long term national cost of an actual program.Social experiments are not necessarily high cost and long term - there have been numerous U.S. educationalexperiments costing less than $50,000. Alice Rivlin has noted, "Experiments may be expensive compared totraditional forms of social research, but even the costs of major experiments are small compared with thecosts of social policies that do not work, or that might have been significantly more effective if experimentalresults had been available" (in Katz and Jackson, 1978, p.207).

A number of problems may arise in the design of a social experiment. The work incentive experimentsprovide many examples of these difficulties. In a large scale experiment the selection of the combination of

treatments to test will be affected by the ultimate feasibility of alternative programs, the cost and the need tostraddle all the possibilities of a national program. As a result of cost constraints, estimates of experimentalresponses may be based on a comparatively small number of observation points. This limits the reliability ofestimates of causal relationships, unless these relationships are simple and linear. The responses of familiesto these treatments may not be independent of their social and economic


37/175

29

characteristics or of general economic conditions. The specifying theory should define the expected responseeffect accurately. For instance, labour supply responses could be measured in terms of labour force

participation rates, employment rates, hours of work or earnings from work. Different measures of responsemay be relevant to different groups, such as dependent spouses and children, sole parents, the unemployed orthe self employed, so that the significance of the overall results of an experiment may depend on which of theresponses is studied. The experimental program also may cause other unexpected social responses that needto be measured in assessing the real costs and effects of a policy change.

The site selected for the location of an experiment should conform to standards of representativeness so thatthe results may be generalisable to the national population. This is the issue of external validity. The sitemust contain sufficient eligible families in order that cost may be reconciled with coverage of all possibleeligible types. Issues of cost and practicality may conflict with those of sample design. The eligibilityconditions may be used to limit sample size and the number of treatment cells, but, for instance, limiting the

sample by income size may bias the estimates of response effects. A similar problem may arise when costconsiderations affect the allocation of the sample between control and experimental groups. Control groups,to which no payments are made, are cheap. Low payment cells are similarly attractive, but consequentestimates of response effects may be biased.

A number of operational problems may arise during the execution of a social experiment. Attrition bias is apotential problem in longitudinal surveys - the labour supply of some families, e.g. transient farm workers,may be systematically related to the factors that cause them to drop out of the experiment. Alternatively,when a sample is maintained through time regardless of changes in the composition of the population,geographically stable families may be over-represented or the experimental treatment, a generous NIT plan,for instance, might influence some families to stay in an area when otherwise they might not. A major

problem of interpretation is associated with the length of the experiment - do families respond differently to athree year experiment than they would to a permanent program? The limited duration of an experiment itselfmight affect labour supply. For male family heads with a permanent job, an experiment of two or three yearsduration may have smaller effects than a permanent NIT program. For other family members, a temporaryexperiment may encourage decreased labour supply in the experimental period. The pattern of responses maynot be detectable in an experiment of relatively short duration.


38/175

30

Whether the time period that controls labour supply decisions is one, three, five or ten years or longer is notknown. In an experiment this may be further complicated if households do not know the duration of cash

payments with certainty, or if an experiment produces the assumption that a permanent NIT will beintroduced (Ferber and Hirsch, 1978, pp. 1394-1395).

Individual responses may be affected by community norms. An experiment in a saturation site, where allfamilies are eligible for a treatment, may produce different results from an experiment in which there are asmall number of eligible families in a number of communities. Responses to an experiment using selectiveenrolment may be biased downward, since they are based on attitudes in communities which have not beenaffected by the proposed widespread social program. The presence of pre-existing welfare programs wouldalso complicate theoretical analysis and comparison of an experiment with a program. The general effect ofwelfare is to make the observed differences between experimental and control groups smaller than theywould otherwise be. The underestimate occurs primarily because welfare payments may induce some

withdrawal of work effort in the control group. On the other hand, results derived from an experiment in thepresence of welfare are perhaps more appropriate estimates of the net effect of a real national NIT programthat may be superimposed in some way on existing income security arrangements.

A major potential problem with social experimentation is the Hawthorne effect, which arises from theexperimental subject knowing that he is a member of a specially treated group, thereby altering hisbehaviour. The Hawthorne effect was identified during a study of the effects of factors in the physicalenvironment on workers, carried out at the Hawthorne Works of the Western Electric Company in Chicagobetween 1927 and 1932. It was found that any experimental attention affected worker's behaviour, e.g. bothincreasing and decreasing illumination in the works led to rises in output (International Encyclopeadia of theSocial Sciences, 1968, Vol. 1, p.241). The Hawthorne effect may jeopardize the internal validity of an

experiment as it results in specious differences between control and experimental groups. For instance,experimental families, knowing that their responses will affect a national welfare program, may consciouslybehave 'responsibly'. This constraint may not operate once a national program is introduced. Theseoperational and design problems may affect the internal or external validity of an experiment. Even the bestfeasible experiment usually will involve a set of compromises and approximations designed to minimisethese problems.


39/175

31

Another problem associated with the experimental approach is the policy relevance of its results. Inparticular, the time delay associated with an experiment may undermine the importance of its conclusions.

For instance, the NIT experiments involved the initial consideration, design, pretesting, the experiment itself,analysis and reporting of the results. The New Jersey experiment was under consideration from 1967, startedin 1968, and the first volume of the Report was published in 1976. During this time the relevance of theexperiment changed significantly as the political feasibility of a negative income tax waxed and waned. Anassociated consideration is the cost of delaying social action until an experiment is concluded. Would it bereasonable to delay reform of the U.S. welfare system until the results of the NIT experiments were fullyanalysed? This suggests that social experiments may be used as alternatives to real action.

Finally, in analysing social experimentation as part of the policy making process, attention should be paid toethical desiderata, such as protection of a subject's privacy, confidentiality of data, and avoidance of harmfultreatments or side effects. An experiment may be considered as a manipulation of people's resources and

lifestyles. This manipulation, even if well intentioned, poses several dilemmas. It is easy to assess the ethicalstatus of 40 years of nontreatment for a group of syphilitics in an experiment under U.S. Public HealthService auspices, or the administration of placebos to randomly selected applicants for birth control pills in aTexas family planning clinic, resulting in several unwanted pregnancies (Rivlin and Timpane, 1975, p-2). Itis more difficult to evaluate an experiment in Panama, testing the hypothesis that protein supplements in thediets of pregnant women and pre-school children can reduce or eliminate retardation in cognitive ability atschool age (Riecken and Boruch, 1974, p.16). The moral ambiguity of the failure to provide benefits to thecontrol group is particularly salient in this example.

Ethical concerns may have very direct effects on the central issues of an experiment. For example, in theNew Jersey experiment, despite initial conditions of confidentiality, the experimenters agreed to a television

network's proposal for free and favourable publicity. Some treatment families were invited to be interviewedon television; a number volunteered and signed releases accepting responsibilty for the consequences of theinterview. One man who appeared on the program was subjected


40/175

32

to ridicule by his fellow workers and his foreman for appearing on television and for being described as"poor". He had a fight with his foreman and was sacked. After a period of unemployment, his wife left him

and applied for maintenance. Being unemployed, he could not pay and was threatened with imprisonment.The story ended "happily" in that the man did obtain a new job and was able to pay maintenance. Thisrelaxation of the initial conditions of confidentiality had very damaging, if unanticipated, consequences forthe individual involved. Presumably it also had a significant impact on his labour supply, the focus of theexperiment, and a permanent effect on his family stability.

This also suggests that it is possible to question the attitude that the effects of guaranteed income on familybehaviour merely are phenomena to be objectively observed. If NIT payments do weaken family cohesion orlabour market ties, does responsibility for experimental subjects extend past the years of treatment? It may benoted that social experimentation is no different in effect from social programs generally, except thatexperiments set up different risks and opportunities for persons otherwise similarly situated and experimental

beneficiaries are treated as means rather than ends. The poor in particular may be used disproportionately inexperiments as they are the focus of social welfare programs. Yet there could be policy relevance in anexperiment testing the effect of increased marginal tax rates on the work incentives of middle and upperincome earners. Such an experiment seems unlikely.

The issue of confidentiality is a major consideration of social surveys and experiments. In the NITexperiments, the concern to protect the privacy and confidentiality of experimental families was challengedon a number of occasions. There were attempted intrusions into the New Jersey data by a grand jury, twocounty welfare departments, the General Accounting office, and the Senate Finance Committee. Some ofthese were intended to detect welfare fraud and to cross-check experimental income statements with taxreturns. A large number of rights and interests may conflict in any such case - the right of the subject to

confidentiality and the responsibility of the researcher to protect it, the responsibility of authorities to detectcrime and fraud and the right of society to be protected from fraud, the right of society to the kind ofknowledge useful for social policy, and the right of public access to information produced from governmentexpenditure. None of these rights is asbsolute, nor are they all inevitably in conflict.


41/175

33

Rivlin and Timpane (1975) suggest a number of general ethical questions that should be asked aboutexperiments (pp.7-13), and propose a "Checklist of Ethical Issues in Social Experiments" (pp.17-19). The

questions suggested include:-

(i) How is it possible to obtain informed consent when the unit of treatment or analysis is aninstitution rather than an individual?

(ii) What consent is necessary when there is little risk to the subject?(iii) How can consent or a reasonable proxy be obtained from subjects incapable of consenting for

themselves (e.g. children)? What degree of unconscious coercion is involved in experimentswith prisoners or dependent groups?

(iv) How much information is necessary for the individual to give informed consent?(v) Does the subject have the right to withdraw from the experiment?(vi) What are the ethical obligations of the investigators in regard to the control group, or to persons

outside the experiment who are nevertheless affected by it?

(vii) What are the obligations of investigators in respect to actual harm that individuals may suffer asthe result of the experiment?

However, the principles adopted by an experimenter may simply be designed for the avoidance of practical

difficulties. The examples discussed above show that ethical concerns may interact with issues ofexperimental design or may directly affect the quality of experimental results. It might be concluded that inmost experiments on people the ethics and the rules and procedures have very little to do with the welfare ofthe subjects; they have much more to do with the ethics and the skills of the profession that is involved(Rivlin and Timpane, 1975, p.175).


42/175

34

work incentive experiments

Documents