Low income populations are more severely affected by economic downturns than their high income counterparts because they are at high risk of unemployment and face reduced earnings in recessions. The use of food stamp benefits and other types of welfare are one mechanism that families can use to buffer the economic shock brought about by income losses due to unemployment during a recession. As a result, during unfavorable economic conditions, low income households disproportionately rely on public assistance including food stamps. What is less understood are the differential effects of macroeconomic conditions on the participation propensities of different population subgroups. Of particular importance are differential effects by age. Depending on their age, poor workers are likely to experience different patterns of unemployment so that their welfare participation patterns also differ. For example, once older workers lose their jobs, their probability of re-employment is lower than that of their younger counterparts. The reduced expectations of re-employment coupled with fewer opportunities to invest in re-training are discouraging to older unemployed persons, often implying that job losses for older workers are permanent, and eventually lead to long term reliance on welfare programs. In contrast, younger poor workers have comparatively higher chances of re-employment and exit from welfare. Whether the age differences in welfare participation will remain unchanged during economic recessions as well is still unanswered. Understanding variations in FSP participation propensities across age groups and their dependency on macroeconomic conditions is essential to predict future demand for food stamp benefits and, by extension, other welfare programs. The continuing growth in FSP demand may point to unexpectedly large fiscal burdens for future taxpayers. Moreover, understanding differential effects of macroeconomic conditions on participation propensities for different groups will allow policy makers to better identify and eventually reach genuine needy families. Therefore, this study aims to investigate FSP participation patterns with a special emphasis on the differential impact of macroeconomic factors across several demographic groups with a particular focus on age cohort effects. Specifically, transitions into and out of FSP will be explicitly addressed using longitudinal data from the Survey of Income and Program Participation (SIPP) 2004 panel. To measure the impact of economic conditions, we match SIPP data with economic measures such as the unemployment rate and wages at the state level available from the Bureau of Labor Statistics. Using the data, monthly movements on and off of FSP of individuals is followed and categorized into entry sample and continuation sample. A household not participating in FSP in one month, and thus being part of the entry sample, can choose between entering or not entering FSP in the subsequent month. Similarly, a household enrolled in one month (and thus part of the continuation sample) can choose between either continuing to stay on FSP or exiting FSP in the next month. This gives rise to two types of transition models. The first model, referred to as the entry model, tackles the decision between entry versus non-entry into FSP, conditional on non-participation in the previous months. The second model, referred to as continuation model, addresses the decision between exiting from versus continuing FSP, conditional upon participation in the preceding month. Two transition models are estimated using probit technique while controlling for individual specific effects. This study finds several important results. First, there are significant age differences in entry into and exit from the FSP. The propensity of entry into the FSP among younger people is higher than among older people while young cohorts are more prone to exiting FSP than the oldest cohort of retired or retirement-bound people. The implication for the elderly is that once receiving FSP benefits, they are very likely to continue the FSP. Their observed low FSP participation rates can thus primarily be attributed to FSP entry barriers. Second, rising unemployment boosts FSP entry propensities and lengthens FSP spells. Changes in wage levels, however, affect neither entry nor exit propensities. Third, the effect of unemployment on FSP continuation propensities varies by age. The youngest cohort responds to increasing unemployment by drastically prolonging their FSP spells whereas the older extend their FSP spells more gradually. For the oldest cohort, FSP exit probabilities are even found to rise in association with rising unemployment, a phenomenon that can be explained by retirement and special transfer programs for the elderly.

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Working or Discussion Paper
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JEL Codes:
I38; J64
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 Record created 2017-04-01, last modified 2017-04-04

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