Economic Effects of Workfare Reforms for Single Mothers: Benefit Substitution and Labour Supply Responses*

• DOI: http://doi.org/10.1111/sjoe.12352
• Author: Katrine Holm Reiso,Julian Vedeler Johnsen
• Date: 01 April 2020
• Published date: 01 April 2020

Scand. J. of Economics 122(2), 494–523, 2020

DOI: 10.1111/sjoe.12352

Economic Effects of Workfare Reforms for

Single Mothers: Benefit Substitution and

Labour Supply Responses*

Julian Vedeler Johnsen

University of Bergen, NO-5020 Bergen, Norway

julian.johnsen@uib.no

Katrine Holm Reiso

Norwegian CompetitionAuthority, NO-5805 Bergen, Norway

katrineholmreiso@gmail.com

Abstract

Weanalyse the economic effects of nationwide Norwegianreforms on the state benefit programme

targeting single mothers. Our results show that for each reduction of 100 Norwegian kroner

(NOK) in benefit payments from the programme, single mothers replaced 65 NOK through

benefit substitution. Their labour supply and disposable income also increased in the short term.

However, the reforms doubled the poverty rate among single mothers in the long term. The

reforms led to a total net gain to public expenditure of 3.6 billion NOK (449 million euros)

during the 1998–2008 period, corresponding to a 14 percent decrease in total benefit payments

to single mothers.

Keywords: Programme evaluation; public policy; welfare

JEL classification:D19; H53; I38

I. Introduction

Single mothers have weak labour market attachment and exceptionally

high poverty rates across countries (Brady and Burroway, 2012). Despite

high female employment rates and multiple state-funded family-policy

measures, this is also true for Norway: single mothers in Norway have

lower levels of education and earnings, and higher levels of poverty and

welfare dependence compared with the general population (Omholt, 2016).

In an attempt to deal with the welfare dependence of single mothers,

in 1998, Norway implemented a nationwide reform of the state benefit

programme, called transitional benefits, targeting this group. The most

*We are grateful for the helpful comments from two anonymous referees, and from Manudeep

Bhuller,Aline B ¨utikofer,Katrine Vellesen Løken,and Kathleen Mullen. This work was supported

by the Research Council of Norway, projects No. 222719 and No. 257598.

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The editors of The Scandinavian Journal of Economics 2019.

J.V. Johnsen and K. H. Reiso 495

important features of this reform were a substantial reduction in the

maximum period for the receipt of transitional benefits, the introduction

of work requirements for eligibility, and the lowering of the maximum

eligible age of the youngest child.

There are two main potential behavioural responses to the reform. On

the one hand, single mothers could respond to the reforms by increasing

their labour market participation. On the other hand, single mothers

could respond to the decrease in transitional benefits by substituting them

with other various publicly funded benefit programmes, so-called benefit

substitution. From the individual perspective, single mothers who are

affected by the reforms might experience a drop in disposable income if

they are unable to offset the loss of transitional benefits with labour earnings

or other benefit payments.

The degree of substitution by various types of other benefit

programmes is also highly relevant for policymakers. From a public

economic perspective, benefit substitution can threaten the welfare state’s

sustainability, given that overall welfare costs might not decrease even

though the costs of a particular programme are reduced. The extent of

benefit substitution depends, among others, on the going wage rate for

the target population, the costs of combining work with child rearing, and

the hassle costs of qualifying for other benefit programmes. If the non-

pecuniary costs of qualifying for other benefit programmes are relatively

low, then this implies that the effective tax rate on labour earnings is

high. In such a scenario, we should expect strong benefit substitution,

potentially crowding out any potential reform effects on employment and

labour earnings. However, if the non-pecuniary costs of qualifying for

other benefit programmes are relatively high, then we should expect low

degrees of benefit substitution and strong reform effects on labour earnings.

Policymakers should consider such trade-offs carefully before reforming

targeted benefit programmes.

We analyse the economic effects of the Norwegian reforms of the

transitional benefit programme for single mothers, and we derive the net

fiscal effects of the reforms on both the affected single mothers and public

expenses. Our analysis accounts for behavioural responses in terms of

benefit substitution and labour supply responses. To identify the causal

effects of the reform, we use a difference-in-differences approach whereby

we compare single mothers with married mothers, who are ineligible for the

targeted benefits, in the periods before and after the reform. We separately

identify the effects of the reforms during the phase-in period (1998–2000),

the period immediately after the full implementation of the reforms (2001–

2004; i.e., short-term effects), and the period spanning several years after

the full implementation (2005–2008; i.e., long-term effects). In our main

empirical specification, we apply a repeated cross-section approach. Thus,

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The editors of The Scandinavian Journal of Economics 2019.