The Effects of After-tax Wages, Transfer Payments, and Child Care Expenses on Labor Market and Transfer Program Participation

This paper examines the degree to which after-tax wages, benefit guarantees, child care expenses, and other factors affect labor market participation and transfer program participation. We first carefully model the budget constraints that families face using a SIPP-based microsimulation model that accurately calculates benefits for the major cash and in-kind transfers, state income taxes, ederal income taxes, and the payroll tax. We then estimate a simple empirical model of labor market and program participation based on Moffitt and Wolfe (1992). The empirical model relates participation decisions to budget constraint variables and other characteristics. Because studies have also found that transfer programs affect the behavior of single-parent families differently than their two-parent counterparts, we estimate the model separately for different types of families. Finally, we use the results of the estimations to simulate the effects of a variety of policies on labor market and transfer participation.