Australian Labour Market Research Workshop, ANU, December 2005 W. Craig Riddell

1. The Extent and Consequences of Educational Upgrading among Welfare Recipients: Evidence from the Self-Sufficiency Project Australian Labour Market Research Workshop, ANU, December 2005 W. Craig Riddell University of British Columbia

2. Motivation 1 • Much interest in welfare-to-work policies but debate over most effective approach • “Work first” strategies emphasize moving recipients into jobs quickly • Reflects view that recipients can best acquire work habits and skills at the workplace

3. “Human capital development” strategies provide training and educational opportunities to welfare recipients • This philosophy evident in Canadian income assistance programs since 1990s • “Providing security and opportunity for Canadians in the future means investing in their skills, in their knowledge and capacity to learn....good skills are an essential part of the social safety net of the future.“ • Paul Martin

4. However, many believe that education and training have limited potential benefits for long-term welfare recipients • “…federal employment policy remains committed to the proposition that education is the single most important requirement for Americans hoping to work their way out of poverty. This assumption, however, flies in the face of available evidence. The evidence indicates that education plays a relatively minor role in determining wages and that it cannot serve …as an effective strategy for restoring Americans’ earning power.” (Lafer, The Job Training Charade)

5. Motivation 2 • Limited empirical evidence on the consequences of gains in formal education among long-term welfare recipients • Methodological contribution: alternative (to IV/natural experiment) approach for estimating impacts of education

6. Motivation 3 • Value of social experiments: sometimes they yield “surprises” in addition to providing evidence on impact of intervention

7. Objectives • How much and what type of educational upgrading do we see in the low-income population? • What impact does education upgrading have on employment and earnings of former welfare recipients? • Might welfare-to-work incentives adversely affect skills acquisition among welfare recipients? • Incentives that encourage full time employment may make recipients less likely to undertake formal education (“time crunch”)

8. Institutional setting • Employ data from the Self-Sufficiency Project (SSP) • SSP designed to test a generous, but temporary, financial incentive to leave welfare • SSP demonstration carried out in provinces of BC and NB in 1990s

9. Objective of SSP • Rigorous test of a financial incentive to exit welfare • Important question: can temporary financial incentives lead to permanent reductions in welfare use? • One mechanism: wage growth associated with accumulated work experience

10. Background on SSP • Eligibility: single parents on welfare for at least 12 months • Sample drawn from BC and NB income assistance (IA) registers • Sample randomly assigned between Nov 1992 and Feb 1995 • Sample size: • program group 2859 • control group 2827

11. Distribution of IA receipt pre-baseline: • Less than a year 1% • 1 to 2 years 25% • 2 to 3 years 32% • More than 3 years 42%

12. SSP Earnings Supplement • Supplement quite generous relative to U.S. programs tested in early 1990s • e.g.in NB 1994, maximum monthly IA for single mom with one child = $712 • gross income if left IA and worked full-time at minimum wage = $867 • under SSP, she would receive a supplement of $817

13. Eligibility for earnings supplement • Program group faced two key time limits • Eligibility: 12 months following random assignment to obtain FT employment • Receipt: up to 3 years of ES providing FT employment maintained

14. SSP Program Features continued • Subsidy recipients become ineligible for IA. • Once eligible, program group members can return to IA at any time. Subsidy is re-established when an eligible person begins working full time again. • Employers are not informed of SSP status. Program group members apply for subsidy payments by mailing copies of payroll forms.

18. SSP and education • Program could influence educational attainment (but direction is ambiguous) • Positive effect: alleviates financial constraints • Negative effect: time crunch

19. Our approach • First, document the extent of upgrading • Second, exploit random assignment and see if there are upgrading differences between programs and controls • Third, estimate effects of upgrading on probability of employment and wage level at end of SSP

20. Extent of upgrading: data • 4 surveys of program participants, combined with administrative data • Baseline (date of random assignment), 18, 36 and 54 month follow-ups • Education questions fairly consistent across surveys (identical between 36 and 54 months)

21. The extent of upgrading: data • Significant number of inconsistent responses to education questions • Use consistent responses for one sample, and then add ‘single mistakes’ for second sample • Also use coursework questions for robustness checks • Less restrictive: Attainment questions only • More restrictive: Impose coursework • Also employ instrumental variable strategy using coursework questions • Insufficient upgraders for university analysis (but in % terms, big increase) • Focus on upgrading to high-school diploma and enrolling in a college or trades school • Measurement error far worse for college/trades, and also institutional reasons to be concerned

24. Key results: extent of upgrading • Evidence of a substantial amount of upgrading • Among high school dropouts at baseline, about 18-20% had completed HS by 54 month survey • Similar upgrading to college/trades among those with no post secondary at baseline

25. Impact of SSP on upgrading • Members of the control group more likely to upgrade (Table 6 in paper) • At 54 months, upgrading to HS completion among dropouts at baseline: • C group: 22.8 (1.2) • T group: 18.2 (1.1) • Difference: 4.6 (1.7) • T-C difference largest in first half of SSP, when employment differences greatest • Results not sensitive to ‘measurement’ sample

26. Impact of SSP on upgrading • Enrollment in vocational college or trade school (among those never enrolled at baseline): • At 54 months: • C group: 23.5 (1.4) • T group: 19.8 (1.3) • Difference: 3.7 (1.8) • Results not sensitive to ‘measurement’ sample

27. Impacts of upgrading • We construct two samples of “potential upgraders” • those who had not completed HS at baseline • those who had never enrolled in college or trade school at baseline • We then compare those who subsequently upgraded to those who did not • Control for other influences using linear regression and non-parametric matching estimation

28. Impacts of upgrading • Upgrading associated with higher employment rates for high-school dropouts • Fig 1: upgraders about 17 percentage points more likely to be employed at 54 month survey

30. Controling for other influences, those who subsequently completed HS had employment gains at 54 months of: • .074 (.020) [regression-based estimates] • .127 (.028) [matching estimates] • Matching estimates pass balancing test and checks for common support • Estimates control for rich set of covariates, including pre-baseline work experience, number/age of children, attitudes toward work, history of IA receipt, disability status

31. Impacts of upgrading • However, no significant employment gains associated with college/trade school enrolment (Fig 3) • HS upgraders also experienced large wage gains relative to non-upgraders (Fig 2) • HS completion: • .256 (.045) [regression-based estimates] • .180 (.049) [matching estimates]

34. Impacts of upgrading • Vocational college/trade school upgraders experienced large wage gains as well: • .233 (.055) [regression-based estimates] • .179 (.039) [matching estimates] • Upgrading impact results also not sensitive to ‘measurement’ sample • Also explore two other issues • Role of legislative change • Role of timing of the upgrading

36. Causality • Do results reflect additional education or unobserved factors correlated with education and labour market outcomes? • Exploit longitudinal nature of data to test this • Matching balancing test does part of this as well; no statistically significant differences in baseline employment and wage rates for all propensity score groupings • Pre-program test: We ask whether people who upgraded at point t have higher employment rates and wages at point t-1, after controlling for observed characteristics • If the effect is causal should see no effect

37. Causality

38. Summary • Appears to be large amount of formal education upgrading among long-term IA recipients • SSP control group between 4 to 5 percentage points more likely to upgrade formal education than program group • At the 54 month point, we find large employment gains for high school completers and impressive wage gains for both high school completers and college/trade school enrolees • Fairly strong evidence that this is not a selection effect • Overall, this may help explain why the SSP supplement offer had little impact on earnings growth; the control group upgraded formal education more whereas program group accumulated more work experience

39. Policy implications • Substantial amount of educational upgrading ocurring so need to be careful with before-after comparisons of programs • “Work first” strategies that emphasize full-time employment may have adverse effects on educational investments • Striking evidence of benefits of increases in formal education supports policies that emphasize human capital investments