Welfare Reform and the Race to the Bottom: Theory and Evidence

Abstract

Economists have argued that welfare migration leads to a race to the bottom in the choice of welfare benefits. Although a system of federal matching grants can remedy this problem, the recent welfare reform law replaced the existing matching-grant structure with block grants, a policy change that appears undesirable. To judge whether this critique of welfare reform is justified, this paper evaluates the evidence in favor of a race to the bottom. After explaining the theoretical effects of welfare migration, the paper surveys the empirical evidence on the occurrence of such migration, concluding that the evidence is mixed. The discussion also considers recent empirical tests for strategic interaction, which show that benefit levels in nearby states affect a given state’s benefit choice. The most plausible source of such interaction is a concern about welfare migration, which leads policymakers to look at benefits in neighboring states when making their own choices. Judging that the evidence appears consistent with the existence of a race to the bottom, the paper concludes that the demise of matching grants may be undesirable from a policy perspective.