Canada: Can income transfers to poor families help children?

Fri May 15 16:39:46 UTC 2009

Can income transfers to poor families help children?
Kevin Milligan   Mark Stabile

Since the 1990s, many countries have reformed their systems of
transfers to low income families with an eye toward improving work
incentives. This column shows, using Canadian data, that well-designed
income transfers can not only help families make their way back to
employment, but also improve the educational, mental health, and
behavioural outcomes of the next generation.

Since the 1990s, many countries have reformed their systems of
transfers to low-income families with an eye toward improving work
incentives—helping people make a transition from welfare to work.
Empirical evidence on transfer programs such as the Earned Income Tax
Credit in the US or the Working Tax Credit in the UK, appears to be
surprisingly robust. Well-designed transfer systems can have a strong
influence on parents’ choice to work or not. This focus on
welfare-to-work, however, seems to have diminished the attention paid
to another important goal of well-designed transfer systems—improving
the wellbeing of recipient families.

How does extra income affect family wellbeing?

Researchers and policy-makers have long been interested in figuring
out the effect of income—or the lack of income—on families and
children. The eternal problem for this research, however, was trying
to establish causal relationships. Some of the same factors that might
lead people to have lower income (impaired mental or physical health;
a troubled childhood; lesser mental or physical capacity; less
ambition or drive) might also lead their families to experience more
problems. For this reason it has been difficult to attribute causally
the family problems to the income shortfalls.

Of late, several researchers have found ways to overcome this
empirical challenge through creative use of data. The primary focus of
much of this scholarship has been education outcomes—and test scores
specifically. Blau (1999), for example, finds that $10,000 of income
leads to around a ¼ standard deviation increase in test scores. Dahl
and Lochner (2008) find bigger results, with a $10,000 increase
leading to an increase of about 60% of a standard deviation in test
scores.

While convincing, this work is somewhat limited by the narrowness of
the outcomes considered. Increased family income could improve
children’s outcomes through at least two distinct channels. First,
direct investments of new money in education (books, educational toys,
tutoring) could improve long-run child outcomes. The developmental
psychology literature has referred to this as the ‘resources’ channel
(Yeung et al, 2002), and this has been the primary focus of most
economic analysis. But the lack of income in a family might lead to
aggravation, stress, and more troubled relations among family members.
These environmental conditions could affect children’s long-run
wellbeing by impairing their emotional, physical, and academic
development. This channel is called the ‘family process’ channel and
has been explored far less in the economics literature.

Evidence from the Canadian child benefit system

In a recent working paper, we address the impact of increased
transfers to poorer families on children’s and families’ outcomes. Our
study brings two advantages. First, we study Canadian children over a
time period in which transfers to families underwent substantial
reform; reform that differed through time, across provinces, and
across family types. This extent of policy variation is useful because
it allows us to examine the impact of extra family income by comparing
similar families who happen to live in different provinces or are
studied in different years. The second advantage of our study is that
we have available a large and detailed survey, the National
Longitudinal Study of Children and Youth (NLSCY), which allows us to
broaden our focus to include several measures indicative of an active
‘family process’ channel.

We have results in three spheres.

First, we find that an extra $1,000 of child benefits leads to an
increase of about 0.07 of a standard deviation in the math scores and
the Peabody Picture Vocabulary Test, a standard measure of language
ability for young children ages four through six.
These findings are of the same magnitude as the Dahl and Lochner
(2008) study mentioned earlier, which helps to corroborate their
result.

Second, we examine the impact of child benefits on indicators of
mental and emotional wellbeing using standardised psychometric scores
available in the NLSCY. We find that more child benefit income leads
to lower aggression in children and decreases in depression scores for
mothers.
Finally, for physical health we find little evidence of improvements
related to increased child benefits—although we do find a decrease in
families reporting their children have been hungry due to lack of
food.
We also break down our results by gender, finding stark differences
across boys and girls.

Girls seem to show greater response on the mental health and
behavioural scores while boys show greater response on test scores.
This certainly suggests that the channels through which benefit income
helps these families may indeed be different for boys than for girls.

Finding that benefit income can improve the emotional and mental
health of children is not only important for child health. Recent
research by Currie and Stabile (2008) and Currie, Stabile, Manivong,
and Roos (2008) shows that improvements in child mental health lead to
long-term academic success, which is strongly correlated with improved
earnings.

Implications for policy
The economic troubles of the past few months have generated a global
whirl of policy activity as fiscal stimulus packages are being
crafted, designed, and implemented around the world at fast speeds. In
the US, President Obama included enhancements to family transfers in
his election platform and it seems likely that improved transfers will
be a part of the fiscal debates in Washington over the next month. It
wouldn’t be surprising if similar measures were considered as part of
stimulus packages elsewhere, as well. Our research suggests that
well-designed income transfers can not only help families make their
way back to employment, but also improve the educational, mental
health, and behavioural outcomes of the next generation.

References
Blau, David M. (1999), “The effect of income on child development,”
The Review of Economics and Statistics, Vol. 81, No. 2, pp. 261-276.

Currie, Janet and Mark Stabile (2008), “Mental Health in Childhood and
Human Capital,” forthcoming in An Economic Perspective on the Problems
of Disadvantaged Youth, Jonathan Gruber (ed.) (Chicago: University of
Chicago for NBER).

Currie, Janet, Mark Stabile, Phongsack Manivong, and Leslie L Roos,
(2008) “Child Health and Young Adult Outcomes” NBER Working Paper
No.14482.

Dahl, Gordon and Lance Lochner (2008), “The impact of family income on
child achievment: Evidence from the Earned Income Tax Credit,” NBER
Working Paper No. 14599.

Milligan, Kevin and Mark Stabile (2008), “Do child tax benefits affect
the wellbeing of children? Evidence from Canadian Child Benefit
Expansions.” NBER Working Paper No. 14624.

Yeung, W. Jean, Miriam Linver, and Jeanne Brooks-Gunn (2002), “How
Money Matters for Young Children’s Development: Parental Investment
and Family Processes,” Child Development, Vol. 73, No. 6, pp.
1861-1879.

 http://www.voxeu.org/index.php?q=node/3567

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