INCOME INSTABILITY AND THE RESPONSE OF THE SAFETY NET BRADLEY L. HARDY∗ This paper examines the response of safety net transfer and tax programs to earnings and income shocks across recessions since the early 1980s. Safety net programs in the United States are designed to dampen economic instability and maintain basic needs for families. Such programs, including TANF, SNAP (food stamps), and the Earned Income Tax Credit (EITC), have been tested during and between recessions of the past 30 years, including the recent 2007–2009 Great Recession. I use matched data in the March Current Population Survey (CPS) from 1980 to 2012 to estimate pre- and post-transfer income instability over the 1980s, 1990s, and 2000s, as well as across recessions. The results are disaggregated by family structure, race, income, and education. Transfer programs are associated with lowered instability levels and fatter trend growth from 1980 to 2012 among socioeconomically disadvantaged subgroups, while the tax system reduces income instability for families in the top 40th percentile of the income distribution. Although the largest instability reductions occur among the poor, since 1980 the safety net appears less responsive to instability for the bottom income quintile, female-headed families, and black families. (JEL I38, J63) I. INTRODUCTION and Unemployment Insurance. Whether within or between recessions, programs like these are The Great Recession and fnancial crisis of designed to absorb negative economic shocks, 2007–2009 tested the capabilities of fscal and but much of the evidence surrounding safety net monetary policy in the United States and through- effectiveness focuses on income, employment, out Organization for Economic Co-operation and and poverty levels;lessemphasishaspreviously Development (OECD) countries (Elsby, Hobijn, been given to understanding the stabilization and Sahin 2010). In the United States, unem- or smoothing of incomes via multiple transfer ployment peaked at 10% in October 2010 (BLS programs, especially among socioeconomically 2012) and poverty rates rose to 15% by 2011, disadvantaged groups (Ben-Shalom, Mofftt, with even higher poverty among children, racial, and Scholz 2012; Larrimore, Burkhauser, and and ethnic minorities (DeNavas-Walt and Proctor Armour 2014; Shaefer and Edin 2013). 2014). The size of the Great Recession motivated This paper provides new information on the American Recovery and Reinvestment Act effectiveness of social safety net programs as (ARRA) of 2009, an $833 billion fscal stim- buffers against earnings and income changes,or ulus of elevated spending and tax cuts (CBO 2012) that boosted spending on “safety net” transfer programs including the Supplemental ABBREVIATIONS Nutrition Assistance Program (SNAP) (food AFDC: Aid to Families with Dependent Children stamps), the Earned Income Tax Credit (EITC), ARRA: American Recovery and Reinvestment Act CPS: Current Population Survey EITC: Earned Income Tax Credit ∗I thank Maureen Pirog, Yonaton Ben-Shalom, James GDP: Gross Domestic Product P. Ziliak, William Spriggs, Arloc Sherman, Thomas DeLeire, OECD: Organization for Economic Co-operation and Charles Hokayem, two anonymous referees, and conference Development participants at the 2012 APPAM meetings and the 2015 Indi- PRWORA: Personal Responsibility and Work ana University SPEA Conference "Federal, State, and Local Opportunity Reconciliation Act Budgets in Jeopardy: A Conference on America’s Future" for PSID: Panel Study of Income Dynamics valuable feedback. Hardy: Assistant Professor, Department of Public Adminis- SIPP: Survey of Income and Program Participation tration & Policy, American University, Washington, DC. SNAP: Supplemental Nutrition Assistance Program Phone 1 202 885 3881, Fax 1 202 885 2347, E-mail TANF: Temporary Assistance for Needy Families [email protected] 1 doi:10.1111/coep.12187 Contemporary Economic Policy (ISSN 1465-7287) ©2016WesternEconomicAssociationInternational 2CONTEMPORARYECONOMICPOLICY instability. Using data from the Current Popula- consumption as a consequence of unstable and tion Survey (CPS), I calculate income instability hard-to-predict income (Attanasio and Weber from 1980 to 2012 across family structure, race, 2010). For socioeconomically disadvantaged income, and educational attainment to highlight families lacking precautionary savings or easy socioeconomic groups historically at higher access to loanable funds (Gottschalk and Mof- risk for poverty. I focus on business cycles to ftt 2009), safety net programs may improve highlight the role and importance of safety net economic well-being by insuring against expo- programs during periods of relative economic sure to involuntary economic instability. For hardship, but I also fnd and report persistently example, programs such as SNAP, the EITC, high income instability between recessions for Unemployment Insurance, and public housing socioeconomically disadvantaged families. To may allow families to better maintain food, measure instability, I construct three defnitions housing, and education consumption patterns in of income: (1) income without safety net transfer response to income shocks and uncertainty. In the spending programs or taxes, (2) income inclu- absence of such insurance mechanisms, income sive of safety net transfer spending programs, instability could harm the individual earner and and (3) income inclusive of safety net transfer their family via diminished child well-being, spending programs and taxes. Using these def- human capital investment, and development initions, I follow CBO (2007), Dahl, DeLeire, (Attanasio and Weber 2010; Gennetian et al. and Schwabish (2011), and Ziliak, Hardy, and 2015; Hardy 2014; Hill et al. 2013). Again, this Bollinger (2011), defning income instability as may be especially true for socioeconomically the standard deviation of the arc percent income disadvantaged families, already at a relatively change using the defnitions described above to higher risk of unemployment and poverty expo- test the collective income-smoothing characteris- sure (Hardy 2012; Keys 2008; Ziliak, Hardy, and tics of transfer programs and the tax system, the Bollinger 2011). way families practically experience the safety net (Currie 2006). B. Measurement and Evidence of Income Across all U.S. families, transfer programs Instability lower family income instability by 18% since the early 1980s, and the trend after accounting for the The measure of instability used in this study safety net is relatively stable toward the end of is the standard deviation of the 2-year arc percent the 2000s. For lower and middle income families, change of family income. To utilize this measure, as well as those headed by a high school gradu- Imatchsurvey-respondentsintheCPStocre- ate, the transfer and tax system effectively halts ate 2-year longitudinal panels (Ziliak, Hardy, and the growth in instability during the late 2000s. Bollinger 2011). This, along with the relatively Although safety net transfer programs lower the larger sample sizes of the CPS, allows me to level of instability, over a 30-year period there is compare the income-smoothing benefts of anti- evidence of a decline in the responsiveness of the poverty programs and tax policies across fam- U.S. safety net to rising instability over time for ily structure, race, income, and education. Many female-headed families, black families, and fam- earnings and income instability studies have used ilies in the bottom income quintile. longitudinal data in the Panel Study of Income Dynamics (PSID) due to the literature’s early emphasis on decomposing instability into its per- II. BACKGROUND ON INCOME INSTABILITY manent and transitory components (Cameron and AND THE SAFETY NET Tracy 1998; Celik et al. 2012; Dahl, DeLeire, and Schwabish 2011; Gittleman and Joyce 1996; A. Policy Relevance Gottschalk and Mofftt 1994; Juhn and McCue Income instability occurs via workers’ fuctu- 2010; Winship 2009). By using the CPS, the ating earnings and incomes, and is largely driven larger sample sizes of the 2-year matched pseudo- by labor force exits (Ziliak, Hardy, and Bollinger panel data allow me to examine trends across 2011). Regarding the policy signifcance of socioeconomic subgroups with greater precision instability, constant relative risk aversion utility relative to traditional panel data sets in which sub- models show that individuals experience lowered group sample sizes are oftentimes small. utility in the event of unstable income and seek As a summary measure, income instability insurance against the risk from such instability; captures permanent shifts related to structural theoretical models consequently predict lowered change alongside transitory shocks more likely HARDY: INCOME INSTABILITY AND THE SAFETY NET 3 related to job loss, as well as any nonseparabili- Reconciliation Act (PRWORA) of 1996—also ties that might drive both theoretical components. known as Welfare Reform—direct assistance for Income instability, vit,isdefnedasthestandard the poor and near-poor has steadily shifted away deviation of the arc percent change: from cash assistance to SNAP and refundable tax credits, particularly the EITC (Danziger 2010; Guzman, Pirog, and Seefeldt 2013). SNAP (1) vit = Var 100 ∗ yit − yit−1 ∕yi provides near-cash assistance for low-income √ where yit is income{ for person[( i in time) t ]}(CBO families by subsidizing food purchases. Mean- 2007; Dahl, DeLeire, and Schwabish 2011; while, the EITC operates through the tax code to Dynan, Elmendorf, and