Work Incentive Experiments

WORK INCENTIVE EXPERIMENTS
IN
THE UNITED STATES AND CANADA
Research Paper No. 12

Research and Statistics Branch
Development Division
Department of Social Security
June 1981
WORK INCENTIVE EXPERIMENTS IN THE UNITED STATES AND CANADA
This paper has been prepared in the Research and Statistics Branch of the Development Division of the
Department of Social Security. The author of the paper is Peter Whiteford, a senior project officer in the
Branch.
ISBN 0 642 51468 2
This series of papers deals with various aspects of income maintenance and related subjects. It is intended to
be of use to researchers and others interested in social security. Views expressed are those of individual
authors and are not necessarily those of the Department of Social Security.
(i)
FOREWORD
If people are paid a guaranteed minimum income (GMI) will they reduce their hours of work or give up work
entirely? The concern that the receipt of welfare payments and the income tests applied to these payments
may act as work disincentives is an important factor in public debate and consideration of income
maintenance alternatives. Until recently there has been only limited empirical evidence on how people
actually behave when they are paid a GMI. However, between 1967 and 1978 a series of social experiments
was carried out in the United States and Canada to investigate the effects of a guaranteed income on the work
behaviour of families.
The results of these experiments are of direct interest to Australia, for in the past decade there has been
considerable support for proposals to reform the income security system through the provision of some form
of GMI. There has also been considerable disagreement about the effect of such reforms on work incentives.
The Commission of Inquiry into Poverty , for instance, felt that its proposed GMI would not damage work
incentives, because "Australians have no respect for the bludger, and nobody is anxious to acquire such
status", and argued that this assessment was confirmed by the results of the U.S. experiments (1975, pp.39-
40). The Priorities Review Staff also considered that the U.S. evidence showed that the number of hours
worked by primary wage earners was not significantly affected by income guarantees (1975, p.11). More
recently, concern with work disincentives has been described in the Australian Financial Review as "that
favourite chestnut of taxation reform" (February 6, 1980, p.11). In contrast, the Report of the Taxation
Review Committee argued that a GMI would seem likely to have consequences for incentives to work and
save which make it impossible to consider such a scheme seriously (1975, pp.30-31). Evidently, this is an
area of some disagreement.
The purpose of this paper is to provide a detailed guide to the main features of the U.S. and Canadian
experiments - the characteristics of the samples, the experimental design, the rules of operation and the
administrative procedures, the data analysis, and in particular the various research findings. In Part 1 the
general background to the U.S. income maintenance experiments is discussed. Part 1.1 analyses the "War on
Poverty" and the specific historical situation out of which these experiments developed. Part 1.2 discusses
one form of GMI, the negative income tax, as a stragegy for dealing with poverty, and Part 1.3 deals with the
work incentives problem associated with this strategy, and the labour supply theory underlying it. In Part 1.4,
the decision to undertake a series of experiments is discussed within the context of alternative methods of
analysing the labour supply effects of a negative income tax.
(ii)
Part 2 deals with the first of these experiments - the New Jersey experiment which started in 1967 - details its
specific background, the sample and the design of the experiment, and the experimental findings. A number
of comments are made about the adequacy of the methodology and the nature of the findings of this
experiment. In Part 3, the Rural (Iowa - North Carolina) experiment is discussed in similar detail; in Part 4,
the Gary experiment; and in Part 5, the Seattle-Denver experiment. The Canadian "Mincome Manitoba"
experiment is discussed in Part 6. Mincome Manitoba had an entirely different background to that of the U.S.
social experiments, and was more recent in origin, so that this discussion is self-contained, although as
similar as possible in organisation and detail to the other parts of the paper. In Part 7, an evaluation of the
experiments is offered. The major issues considered are the work incentives problem and how far these
experiments can go towards resolving it, the relevance of the experiments to Australian conditions, the debate
in Australia on the desirability of a guaranteed income, and experimentation as a social policy strategy.
Certain administrative, operational and analytical features were common to all the experiments and these are
discussed in the appendices.
The literature on all these topics is vast, but of limited availability. For instance, there are six volumes of
"official" documentation on the Rural Income Maintenance experiment alone, but none of these volumes was
obtainable at the time of writing; the Gary and Seattle-Denver experiments are served by less than
comprehensive summaries; analysis of Mincome Manitoba has not been finalised by the researchers. This
leaves scope for substantial revision of this paper in future years.
ACKNOWLEDGEMENTS
I would like to thank the many officers of the Development Division of the Department of Social Security
who provided very considerable assistance in the preparation of this paper.
(iii)
WORK INCENTIVE EXPERIMENTS

IN THE UNITED STATES AND CANADA
1. INTRODUCTION PAGE
1.1 The "War on Poverty" 1

1.2 Negative Income Taxation 7
1.3 Work Incentives 18
1.4 Social Experimentation 23
2. THE NEW JERSEY EXPERIMENT
2.1 Background 34
Origin and objectives

Duration and cost
2.2 The Sample and Experimental Design 36
Eligibility criteria
Sample selection
Characteristics of the sample
Experimental treatments
Sample attrition rate
Administrative features of the experiment
2.3 Findings 41
2.4 Comments 53
3. THE RURAL EXPERIMENT
3.1 Background 58

Duration and cost
Sample selection
3.3 Findings 63
3.4 Comments 72
(iv)
PAGE
4. THE GARY EXPERIMENT
4.1 Background 76

Duration and cost
Sample selection
4.3 Findings 82
4.4 Comments 86
5. THE SEATTLE-DENVER EXPERIMENT
5.1 Background 88

Duration and cost
Sample selection
5.3 Findings 93
5.4 Comments 101
6. MINCOME MANITOBA
6.1 Background 102

Duration and cost
Sample selection
(v)
PAGE
6.3 Analysis of Data 109
6.4 Comments 110
7. CONCLUSION 113
7.1 Work Incentives and Income Security -

Answering Policy Questions 113
7.2 Possibilities for Social Welfare in Australia -

A Guaranteed Income? 122
7.3 Social Experimentation and Public Policy -

Asking Policy Questions 131
APPENDIX ONE : Administrative Features of the 135

Experiments
APPENDIX TWO : Rules of Operation 138
APPENDIX THREE : Analysis of Data 142
BIBLIOGRAPHY 145
1. INTRODUCTION
1.1 The "War on Poverty"
Income maintenance experiments in the United States were established against the background of President
Johnson's 1964 State of the Union Message, that "The Administration today, here and now, declares
unconditional war on poverty in America". The political antecedents of this "War on Poverty" were complex,
and are open to varying interpretations. At least three main factors were preconditions for and continuing
influences on the complex of social programs and the growth in welfare expenditure that constituted the
"War on Poverty".
First, successive Administrations after 1960 were broadly committed to the abolition of poverty and reform
of the income security system. Indeed, Moynihan (1969, p.6) felt that Kennedy's Presidential campaign had
propounded a fairly radical critique of American society. Kennedy's exposure to poverty while electioneering
in West Virginia (which was significant in the closely contested 1960 election) seems to have impressed on
him the need for action in this area. More importantly, Johnson's sweeping Presidential victory was
accompanied in 1965 by the re-emergence, for the first time since 1938, of a liberal Democrat majority in
Congress. President Nixon's welfare reform proposal, the Family Assistance Plan carried on this political
commitment, as more recently did President Carter's proposed Program for Better Jobs and Income.
Second, the period 1960 to 1969 was one of substantial economic expansion for the United States. The
annual growth rate of Gross National Product (GNP) was 4.5 per cent, compared with 3.2 per cent for the
period 1950 to 1960 and 2.9 per cent for the period 1929 to 1950. GNP at constant (1958) prices increased
from $497.6 billion in 1960 to $725.6 billion in 1969, and per capita real personal income increased from
$2,157 to $2,999 over the period. In certain circles of government, at least, this period of unbroken growth
was cause for enormous optimism, and was described as "a magnificent achievement. As a result, the general
quality and decency of life in the United States is incomparably greater than in years past" (Moynihan,
1973a, p.70).
Third, despite this general prosperity, or perhaps because of it, there was a renewed awareness of "the
paradox of poverty amidst plenty". Part of this paradox was due to unemployment, for, despite unprecedented
levels of economic activity, 1961 saw the highest rates of unemployment since the Depression. Between
1958 and 1965 unemployment ranged between 5 per cent and 7 per cent of the labour force, and black
unemployment between 10 per cent and 12 per cent. The Civil Rights movement
2
of the early and middle 1960s also concentrated political attention on the black poor, for "the Sixties were a
time of marches and militancy, of students and churches committing themselves to abolishing want, and of
documentary presentations of the nation's domestic shame by all the mass media" (Harrington, 1962, p.ix).
A number of official and unofficial studies contributed to this renewed awareness of poverty. One of the
most influential was Harrington's The Other America (1962), in which he compared "the familiar America ....
celebrated in speeches and advertised on television and in the magazines ... (with) the highest mass standard
of living the world has ever known" to the other America, where he estimated forty to fifty million were poor
(p.1). The poor were represented in part by the almost six million Americans, mainly black adults living in
Northern cities, who were not even enumerated in the 1960 Census: "their lives were so marginal - no
permanent address, no mail, no phone number, no regular job - that they did not even achieve the dignity of
being a statistic" (Harrington, 1962, p.xiii).
The 1964 Report to the President from the Council of Economic Advisors also emphasised that "the poor
inhabit a world scarcely recognizable ... a world apart, whose inhabitants are isolated from the mainstream of
American life and alienated from its values" (pp.55-56). A most important step in this renewed awareness of
poverty was the development of "official" poverty lines by the Social Security Administration. The Social
Security Administration used the Department of Agriculture's Economy Food Plan as the core of its poverty
index. The Economy Food Plan specified required weekly quantities of foods in particular groups for a
nutritionally adequate diet for individuals of different age and sex, and published cost estimates of these diets
at U.S. average prices. The Social Security Administration defined the poverty line as income less than three
times the cost of the Economy Food Plan, adapted for family size and farm - non-farm differences. The
Economy Food Plan was seen as providing for a temporary, emergency diet that in January 1964 would cost
22c per meal or $4.60 per person per week. The actual amounts of food suggested varied with the sex and
age of family members. For example, for men and teenage boys, the cost was higher, while for young
children and women, the cost was less. For all types of four-person, non-farm families averaged together, the
poverty line was $3,100 per year.
on the basis of this poverty line, Orshansky (1965, pp.3-29) calculated that in 1963, 7.2 million families and
5 million individuals were poor, or that for 34.5 million persons "everyday living implied choosing between
an adequate diet of the most economical sort and some other necessity, because there was not enough money
to have both". In terms of the shape of poverty
3
in 1963, one half of all poor families had a working head, almost one third a head working full time. Non-
white families were three times more likely to be in poverty than white families, but 70 per cent of the poor
were white. Female headed families were also three times more likely to be in poverty than male headed
families, but three quarters of poor families were headed by men. Fifteen million children under 18 and five
million persons over 65 were poor. Moreover, using a food plan that was only 20 per cent more generous
would lead to estimates of the population in poverty as numbering 50 million, or approximately one quarter
of the U.S. population.
The main programs of the "War on Poverty" were instituted under the Economic Opportunity Act of 1964
which established programs, such as the Job Corps and VISTA (Volunteers in Service to America), to be
administered by the new office of Economic Opportunity (OEO) within the Executive Office of the
President. The early emphasis of the OEO was on community action programs, through which funds were
channelled directly to inner-city neighbourhoods. This strategy of "maximum feasible participation" of the
poor themselves was developed through federal support for the establishment of new services, public and
private, offering the poor assistance and information about welfare benefits, federal sponsorship of litigation
to challenge local laws and policies that denied them public assistance, and federal support of pressure
groups, such as the National Welfare Rights Organization (NWRO) which mounted public campaigns on
behalf of the poor. In 1964, the first year of the Economic Opportunity Act, $350 million was allocated to
community action programs. By 1967 the budget of OEO was $1.5 billion a year. Apart from these
community action programs, the government sponsored a wide range of activities - youth development
projects to prevent and combat juvenile delinquency, mental health centres, remedial educational services,
model neighbourhood projects of housing renovation and block renewal, and neighbourhood services centres,
offering legal aid, medical clinics, housing advice and the like. General social welfare expenditure (covering
health, education and welfare) also increased from $52.2 billion (10.6 per cent of GNP and 38.0 per cent of
all government expenditures) in 1960, to $99.7 billion (12.9 per cent and 42.4 per cent respectively) in 1967,
to $145.8 billion (15.3 per cent and 47.8 per cent respectively) in 1970, to $215.2 billion (55.3 per cent of all
government expenditures) in 1973 (Browning, 1975, p.16; and U.S. Department of Commerce, 1975, p.340).
4
The decision to undertake an income maintenance experiment was also influenced by a perceived "crisis in
welfare". The main components of this crisis were:
(i) an increase in the number of welfare recipients and in total program costs, without an apparent
impact on poverty;
(ii) a critical reaction to welfare aspects of the "War on Poverty"; and
(iii) the continuing inadequacies of the public assistance system itself.
The United States income security system has a number of distinct components. The term "social security" is
popularly used to refer to the basic national social insurance program - old age, survivors, disability and
health insurance (OASDHI). The cash benefits of this program are designed to replace, at least partially, the
income that is lost when a worker retires, becomes severely disabled or dies. The worker's entitlement to
benefits is based on past employment and the amount of cash benefits received is related to earnings in
covered work - the more the worker earns, the greater, up to a ceiling, is his protection. The system is
contributory , coverage is compulsory, and while the benefits are not formally means tested there is a
"retirement test" that effectively operates as an income test on earned income for those aged under 72 years.
Many industrial and commercial workers in private industry are covered by Unemployment Insurance, which
is available to unemployed workers who have demonstrated their attachment to the labour force by a
specified amount of recent work and/or earnings in covered employment. Unlike the other social insurance
programs, which are administered by the Federal Government alone, the Unemployment Insurance system is
a joint responsibility of the Federal and State governments. These insurance programs were established
nationally by the 1935 Social Security Act, in response to the Depression. Social insurance programs in the
U.S. are very different to social security programs in Australia, or rather, the Australian system being
essentially selective-categorical with flat rate, income tested benefits and without an explicit insurance
component is different from the social security systems of all developed countries except New Zealand.
Moreover, in the U.S., there is no system like Family Allowances of universal cash payments for children.
5
While there are tax concessions in respect of children, these do not assist the poorest families whose income
is so low that they do not pay tax. There are also a variety of public assistance or "welfare" programs
available to people who do not meet the work-related eligibility requirements of the social insurance system.
In the 1960s, the main welfare programs were Old Age Assistance (OAA), Aid to Families with Dependent
Children (AFDC), Aid to the Blind (AB), and Aid to the Permanently and Totally Disabled (APTD), which
also were established under the 1935 Social Security Act and involved matching Federal grants to the States
for money payments and social services for persons when they could not meet subsistence needs or special
needs such as medical care. These benefits were means tested, and each State had considerable latitude in
determining how their programs would be organised and administered, who was eligible for assistance, and
the amount of the assistance payments. General Assistance (GA), which was financed solely by State and
local funds, was also available for some needy people who were not eligible or whose needs were not fully
met under the Federally aided public assistance programs.* Partly because it is distinguished from the social
insurance system, it appears that the U.S. public assistance system has more stigma attached to it than the
Australian social security system, which in other regards shares many of its features. In the U.S. the term
"welfare" has pejorative overtones and concern with "welfare dependency" underlay many policy debates.
Despite continuing prosperity, and by 1965 falling unemployment, the number of welfare recipients
continued to rise. Total expenditure on public assistance had risen from $3.8 billion in 1960 to $5.5 billion in
1965, and reached $14.5 billion in 1970. Of the public assistance programs it was the Aid to Families with
Dependent Children (AFDC) program that experienced the greatest rise in the number of recipients. From 3.0
million recipients in 1960, the level rose to 4.4 million in 1965, 6.0
* From January 1974, public assistance for the aged, blind and disabled became a Federal responsibility.
Benefits were increased, renamed the Supplemental Security Income (SSI) and administered by the Social
Security Administration. Under SSI, uniform eligibility standards apply from State to State, although there
are provisions for discretionary State supplementation to benefits. A further important development in the
1970s was the growth of the Food Stamp program. The Food Stamps program has been a universal in-kind
program for food - eligible families purchase coupons and use them like cash for most food items. The
price a given family pays for coupons varies with its income and the value of the stamps varies with
family size. In July 1974, legislation made food stamps available in all counties of the U.S. and to all
persons qualifying under the income test. For further details, see Plotnick and Skidmore (1975) and
MacDonald (1977).
6
million in 1968 and 9.7 million by the end of the decade (U.S. Department of Commerce, 1975, p.356). A
very great part of the rise - and the rise was greatest after 1965 - was due to the "War on Poverty" itself,
which was intended to extend assistance to the eligible poor. The combination of liberalised eligibiity and
increasing numbers of those eligible actually applying for benefits was compounded by increasing numbers
of broken families and by large scale migration from the South. Between 1940 and 1970 twenty million
Americans left rural areas, most for the Northern cities. While the total number of AFDC families rose by
107 per cent in the Sixties, in the major cities - New York, Philadelphia, Chicago, Detroit and Los Angeles -
enrolment rose by 217 per cent (Piven and Cloward, 1971, pp.183-212). The increasing AFDC rolls were a
cause of alarm to certain commentators, as in most states AFDC was only payable to families without a male
head, and therefore the public assistance system could be characterised as contributing to the destruction of
the family and to the rise of welfare dependency. "There is one unmistakeable lesson in American history: a
community that allows a large number of young men to grow up in broken families dominated by women,
never acquiring any stable relationship to male authority, never acquiring any rational expectations about the
future - that community asks for and gets chaos. Crime, violence, unrest, disorder ..." (Moynihan, 1973a,
p.76).
Despite emotive characterisations, public assistance constituted a genuine problem to any Administration. As
Steiner noted, "Public assistance introduces problems of race, of sex, of religion, and of family relationships.
It is hard to think of four areas most American politicans would rather avoid" (in Moynihan, 1973a, p.144).
Increasing welfare caseloads and costs highlighted the need for welfare reform. The public welfare system
was the only national program designed to provide income support exclusively to the poor, and yet it covered
only about one quarter of the poor, or 7.25 million of the 29.7 million still poor in 1966. The patchwork of
programs resulted in inequities between categories of assistance and particularly between States. In 1965, the
average monthly payment per recipient was $31.65 under General Assistance, $32.85 under AFDC, $66.50
under Aid to the Permanently and Totally Disabled, $81.35 under Aid to the Blind, and $63.10 under Old
Age Assistance. As well, the 1965 AFDC average monthly payment per recipient was $32.85 nationwide, but
ranged from $8.36 per recipient in Mississippi to $51.39 in New Jersey. Even Old Age Assistance, with a
national yearly average payment of $941, ranged from $492 per person in Mississippi to $1,333 in
Wisconsin.
Variations of this order were seen to provide incentives for migration from low payment States to high
payment States, and
7
produced pressure for residential requirements for State welfare. In 29 States, eligibility for AFDC was
specifically tied to the absence of a male head. This requirement was seen as an incentive to family
breakdown. Most public assistance payments were subject to a 100 per cent reduction rate - for every $1
earned in work, assistance was reduced by $1. The combination of such income tests on public assistance and
on, say, Medicaid and Food Stamps, may have resulted in effective marginal tax rates of over 100 per cent,
which in turn may have lead to significant work disincentives. As well, the varying payment levels were
compounded by complex and discretionary regulations, with the consequent suspicion that eligibility was
arbitrarily determined in many cases. Community pressure to hold down costs and to police welfare fraud
was seen as so burdening social workers that little opportunity was left for remedial casework. Tobin et al.
(1967, p.1) felt that "administration of public assistance is now largely a matter of policing the behaviour of
the poor to prevent them from 'cheating' the taxpayers, rather than a program for helping them improve their
economic status through their own efforts". Finally, the operation of the public assistance system was
perceived to stigmatise the poor who, as is clear from the above discussion, were expected by some to cheat
the system, give up work, become dependent on welfare or break up their families.
While the Department of Health, Education, and Welfare (HEW) was responsible for these public assistance
programs, the OEO was responsible for anti-poverty policy. Within the OEO, the Office of Research, Plans,
Programs and Evaluation (RPP&E) considered strategies for improving income maintenance. It was
considered that an improved income maintenance system should raise the incomes of the poor, narrow State
disparities, reduce inequities between benefit categories, increase work incentives, reduce stigma and
improve family stability. The choices appeared to be between reform of the existing welfare system, a
children's or family allowance system, or a negative income tax.
1.2 Negative Income Taxation
A negative income tax (NIT) is one form of guaranteed minimum income (GMI). Discussion of GMIs has
become difficult because the term has come to mean different things to different people, and proposals of
vastly different scope and payment level have been grouped under the same rubric even though they are not
alternative means of solving the same problems (Marmor, 1971, p-83). In particular, terms used in the United
States in the 1960s have been used in Australia in the 1970s to describe quite different income support
schemes.
The term "guaranteed minimum income" is used here to refer to programs which have the common objective
of providing the persons to whom they relate with a basic level of income support. All
8
GMIs employ three basic variables - an income guarantee, a withdrawal rate * applied against a "tax base",
and a break-even level of income where net payments become zero. The relationship between these variables
is such that any two determine the third.
Figure 1 illustrates these essential elements of a GMI by comparing the disposable income (DY) after tax and
cash transfers to the corresponding private income (Y) before tax and transfers.
The line OAB shows the relationship between DY and Y under usual taxation arrangements. After starting
from the origin with a slope of one, since no tax is paid below the income tax threshold of Ye, OAB takes on
successively lower slopes as income increases and progressively higher tax rates apply. The total tax is the
vertical distance between OAB and the 45 degree line. A GMI would substitute the relationship CAB for
OAB. If a person's income is above the tax threshold, Ye, tax is paid as usual. Below ye individuals will have
a larger disposable income than they did before; the line CA is higher than OA. Those with no private
income would receive the income guarantee of OC. Those with income below Ye would receive some
benefits. Thus Ye is the break-even level and the slope of the line CA is the income retention rate, which is
the complement of the withdrawal rate.
This simple and general form of GMI can be varied according to the level of the guarantee and the
withdrawal rate, the breakeven level that is considered desirable, the taxation and income security
arrangements that the GMI is integrated with or supersedes, or the eligibility criteria that are imposed.
Consequently a GMI can be of four broad types:-
(i) an income tested, categorical scheme;
(ii) a social dividend or demogrant;
(iii) a tax credit scheme;
(iv) a negative income tax.
Under the definition used above, selective-categorical payments such as AFDC in the U.S. or, say, Age
Pensions in Australia are a form of GMI - they provide an income guarantee to eligible persons in selected
population categories. An income or means test is applied so that as private income increases the guarantee
or benefit is withdrawn until the break-even level is reached when no assistance is provided.
*In this paper, the terms "withdrawal rate", "benefit reduction rate" and "negative tax rate" are used
interchangeably.
10
However, the term "guaranteed minimum income" has commonly been envisaged as referring to programs
which, through an integration of the taxation and income security systems, potentially provide support to all
rather than part of the population, and with low income as the only criterion for assistance. For example,
under a social dividend scheme, a demogrant is paid to all income units, regardless of income level, and the
payment is not offset against positive tax. Families with no independent incomes would receive only the
social dividend, which would be their guaranteed income, and they would pay no tax. All families with
private income would receive the full social dividend, and would pay tax, which could be less, equal to or
more than the dividend received. A demogrant scheme was proposed by Senator McGovern in the U.S.
Presidential campaign in 1972. Family Allowances in Australia are also a form of social dividend.
In a tax credit scheme, positive tax is applied at all levels of private income, but each taxpayer is allowed a
credit to be deducted from that tax. The size of the credit would depend on the number of dependants the
taxpayer had, but not on his private income. At low levels of private income, the tax credit would exceed
positive tax payable and a transfer payment would be made from the Government to the taxpayer. At the
break-even level, the positive tax would equal the tax credit, and no payment would be made, nor would any
tax be payable. Above the break-even level, the positive tax would exceed the tax credit, and the taxpayer
would start to pay tax. A distinguishing feature of the tax credit scheme, in comparison with a social
dividend, is that the taxpayer receives or pays only the net amount.
Negative income taxation (NIT) involves the use of the tax system to pay income subsidies that would close
some portion of the "poverty gap", i.e. the difference between an individual's or family's private income and
the income they would need in order not to be officially defined as poor, or some proportion of the difference
between private income and unused personal tax exemptions plus minimum standard deductions. In this
situation the income guarantee is the amount received when preallowance income is zero; the tax base is the
difference between the level of actual income and some standard, either the family's poverty line or unused
exemptions and deductions; the negative tax rate or withdrawal rate is the proportion of this difference that is
paid out.
There is some difficulty in distinguishing a negative income tax from a tax credit, and these two terms in
particular have often been confused or used interchangeably. One usual distinction is that tax credits are
integrated with the tax system and all income units face a standard rate of tax (perhaps with a surtax at higher
income levels), while under a NIT those receiving assistance face a higher rate of tax until they exceed
11
the break-even level, where they are subject to standard positive tax rates. In this sense, a NIT is little
different from pre-existing welfare provisions except that it may apply to all income units rather than those
who satisfy categorical eligibility requirements. As well, tax credits are often envisaged as providing only a
supplement to income rather than a minimum level for adequate support. For instance, in 1972 the British
Government considered a child tax credit that would have provided a supplement to income for families with
children, and Canada introduced a similar child tax credit in 1979. On the other hand the Priorities Review
Staff recommended an Australian tax credit scheme that would have provided payments sufficient for people
to live on.
All these forms of GMI could be constructed to have the same net results for the individuals and families
involved. The choice between the various broad types of GMI may therefore depend on the balance achieved
between objectives, design and impact. Indeed, all income support schemes involve some tradeoffs between
different objectives and, consequently, different design features. For instance, a social dividend will involve a
much greater volume of income flows between families and the Government, in the form of flat demogrants
and higher income taxes, than will a tax credit or a NIT. This may be considered a disadvantage, but payment
of a social dividend will also ensure that all families have a regular and stable source of income. Again, the
total budgetary cost (i.e. the cost of the net assistance provided to those below the break-even point) is likely
to be a significant factor in assessing whether a particular scheme should be introduced. That cost will be a
function of the level of net payments and the number of persons eligible for such payments, which in turn
will be determined by the guarantee level, the withdrawal rate and the shape of the income distribution within
society. In order to ensure adequacy of payments to the poor it would be desirable to have a high guarantee
level. In order to ensure that people are not discouraged from providing for themselves, it would be desirable
to have a low withdrawal rate. But a high guarantee level and a low withdrawal rate are incompatible with a
low break-even point, and consequently the number of people receiving benefits would be greatly increased,
as would the overall cost. Moreover, there will also be a leakage of benefits to people who are not judged to
be poor. To make payments to people who are not poor will mean, within given budgetary constraints, that
the effective level of the guarantee will be reduced, thus disadvantaging those with very low private income.
Marmor (1971, pp.86-90) has suggested a number of criteria for assessing various income maintenance
alternatives. These are:-
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(i) Adequacy - what portion of the "poverty gap", either in aggregate or for individuals, is closed
by the proposal?
(ii) Stigma - what degree of stigma is associated with the source, form and administration of the
proposal, and what effect does this have on take-up?
(iii) Equitable Efficiency - what proportion of the benefits of a program go to the non-poor as well
as the poor (vertical efficiency)? What proportion of the poor or other target groups receive the
intended benefits (horizontal efficiency)?
(iv) Incentive Effects - what effects will the plan have on work, saving and investment, family size
and composition, economic growth and national productivity?
(v) Program Costs - what are the total expenditures at all levels of government, taking into account
savings in other federal, state and local programs, tax "clawbacks", and costs due to changed
work behaviour?
(vi) Political Support - what is the nature and extent of approval for a given program, among the
public, the administration and the legislature?
It was issues of this type that U.S. researchers and policy makers took into account when considering anti-
poverty programs and welfare reform proposals. By the mid 1960s the negative income tax had become the
preferred strategy for reform.
Discussion of negative income taxation in the United States is conventionally dated from Friedman's
Capitalism and Freedom (1962,pp.190-195), although it was not until a later series of articles (1966,1968a,
1968b) that he proposed a specific NIT plan to replace existing U.S. public assistance provisions. In 1966, a
family of four persons (husband, wife and two dependants) was entitled to personal income tax exemptions
and minimum deductions of $3,000. If such a family had a private income of $3,000, its exemptions and
deductions just offset its income - it had a zero taxable income and paid no tax. If the family had an income
of $4,000, it had a positive taxable income of $1,000 and was required to pay a tax of 14.0 per cent, leaving it
with a disposable income of $3,860. If family income was $2,000, it could be said to have a negative taxable
income of $1,000, the difference between minimum standard exemptions and deductions and private income.
Under the existing system, this negative taxable income was disregarded. Friedman proposed that families be
entitled to receive 50 per cent of this difference, thus giving families with $2,000 private income a further
$500, and a total disposable income of $2,500. If
13
a family had no private income, it would be entitled to receive 50 per cent of $3,000. This $1,500 would be
the income guarantee, which would be reduced by the 50 per cent withdrawal rate applied against the "tax
base" (exemptions and deductions minus private income) until at $3,000 the break-even level would be
reached and no NIT payments would be made.
Support for the negative income tax concept involved the observation that such a provision would make the
tax system symmetrical. For instance, the positive income tax system allows the government to share in some
portion of a family's earnings when they exceed a certain minimum defined by exemptions and deductions.
In a negative income tax system, the government, by providing benefits, shares in the shortfall of family
income below some minimum, not necessarily defined in the same way. Support for the NIT concept may
have been more strongly influenced by considerations of equity. The poor, and in particular those whose
incomes were so low that they were not taxable, could not share fully in the benefits of the then current
income tax exemptions and deductions. Families of different sizes and with the same (non-taxable) income
paid the same amount of income tax - none - and this was seen as an inequitable treatment of families'
differing needs.
Part of the attraction of the NIT was ideological. Lampman (1976,p.xii) saw negative income taxation as a
notion "congruent with the proposition that poverty is merely lack of money. It competed with the notion that
the poor needed sympathetic counselling, job training and public service employment or in-kind transfers
such as food stamps, medical care and housing". Indeed, as a "market oriented solution to the welfare
problem", a NIT would be "consonant with the country's traditions" (Hildebrand, 1967, p.145). In a certain
sense, negative income taxation was the economists' way of fighting poverty. Yet, a remarkable feature of the
NIT was its attractiveness across the political spectrum, partly because negative taxation represented both a
limitation on the intrusion of government welfare programs into individual freedoms and an expansion of the
principles of universal income security.
A continuing theme has been that a guaranteed minimum income would be a necessary response to
technological change - to the "next step in socioeconomic evolution", when work would be redundant and the
link between work and the distribution of income would be broken (Theobald, 1967). However, the most
important source of support for a NIT was its perceived superiority as an anti-poverty strategy. The basis of
the transfer was pre-NIT income and family size, thus avoiding the categorisations in existing social
insurance and welfare programs. It was felt that this system could avoid inequities between categories of
public assistance and reduce the stigma associated with receipt of welfare. An income security program
14
based on need and adjusted for family size would provide assistance to all the poor, regardless of the reasons
for their poverty, something the public assistance and social insurance systems did not. The tax system, being
a national system, would solve the problem of vastly differing levels of welfare between States and thus
reduce incentives for internal migration. No negative income tax envisaged had a reduction rate as high as
100 per cent, as did public assistance. A NIT should provide greater work incentives than welfare.
On balance, the advantages of a NIT seemed greater than those of alternatives such as family allowances or
reform of the existing welfare system. For example, in 1968 a child allowance scheme was proposed that
would have provided a universal benefit of $600 per child per annum, the elimination of tax exemptions for
children, and a special tax to decrease net benefits as income increased (Brazer, 1968, p.142). This approach
was rejected primarily because of its perceived lack of "efficiency". According to Moynihan (1973b,pp.49-
50), the family allowances strategy was rejected because it made no distinction between the poor and the
non-poor, and because it was judged to be a "baby bonus" rather than an anti-poverty device. At the same
time, one of the best known proposals to reform the existing welfare system was the "Nathan plan", which
would have decreased State variations in benefit levels through a national minimum standard for existing
categories of public assistance, to be administered by the existing Federal-State welfare apparatus (Marmor,
1971, pp.90-92). This proposal would have preserved many of the inequities of the public assistance system.
A more thoroughgoing reform seemed desirable, even though that favoured, a NIT, was not without
difficulties.
Figure 2, opposite, derived from Tobin et al. (1967, pp.4-7, 23-27) illustrates in more detail the problems
faced in designing a NIT and the factors that U.S. policy makers had to take account of in considering
alternative NIT plans. The example is of a High (H) schedule plan which would guarantee allowances that
approach the poverty line. The offsetting tax rate would be 50 per cent, compared with the 100 per cent
operating under U.S. public assistance programs. A four person family under this schedule would receive
$2,600 - $800 each per adult and $500 for each child. Figure 2 compares the disposable income (DY) after
tax and allowance to the corresponding income (Y) before tax or allowance. The line OAB shows the
relationship between DY and Y under the tax laws operating in the U.S. in the early 1960s. After starting
from the origin with a slope of one since four person families with incomes below $3,000 paid no tax, OAB
takes on successively lower slopes as income increases and progressively higher tax rates apply.
16
The H-50 schedule plan would substitute the relationship CDB for OAB. Below Y of $6,144 families will
have larger disposable incomes than they did before; the line CD is higher than the corresponding segment of
OAB. Those with no income would get an allowance of $2,600. Those with incomes below the break-even
level of $5,200 would receive cash benefits, whereas those families whose income had been between $3,000
and $5,200 would have paid tax previously. The plan illustrated is also designed to provide lower tax for
families with incomes between $5,200 and $6,144. The plan includes those families with incomes higher
than the break-even level of $5,200 in order to avoid confiscatory marginal tax rates. The schedule wipes out
all tax payments on incomes below $5,200, but if the prior tax rates were to apply to all incomes above
$5,200, then a 4 person family with an income of $5,201 would pay a tax of $32, leaving it with a disposable
income of $5,169. The plan avoids this problem by giving the family the option to stay under the NIT system
until its disposable income is exactly the same under the positive and negative income tax; in this case the
"tax breakeven" income would be $6,144. Such "notches" need always be taken into account in consideration
of NIT plans. An important criterion for assessing a NIT is whether it would treat the poor and the near-poor
equitably. Of course, reducing tax rates for the near-poor would increase the overall cost of a NIT.
Tobin et al., (1967,pp.23-27) estimated the cost of the NIT illustrated for the U.S. in 1967 as $26 billion, of
which $18.2 billion would have gone to those with incomes below $3,000, $6.7 billion to those with incomes
between $3,000 and $5,200 and $1.1 billion to those with incomes between $5,200 and $6,144. In
comparison, it was also estimated that a NIT with the same guarantee levels, but a tax rate of 33.3 per cent
would have cost $49.3 billion. An alternative schedule, where the guarantee would have been $1,600 for a
family of four and with a 50 per cent tax rate, would have cost $7 billion. Given that total U.S. social welfare
expenditures (including education, health, social security, and public assistance) in 1967 had been $99.7
billion, and expenditure on public assistance around $6 billion, it would seem quixotic to consider a high
schedule - 33.3 per cent tax rate plan that would cost around $50 billion. Moreover, Browning (1975, p.4)
estimated that since only a part of net national product is available as a tax base to finance redistributive
programs, that for every 1 per cent of net national product to be redistributed, marginal tax rates for all
families would need to be increased by 5 per cent. In a further example, Green and Lampman (1967, pp.125-
126) describe a plan that in 1964 would have been sufficient to guarantee every individual and family in the
U.S. an income in excess of the poverty line. The net cost of the plan would have been determined by the tax
rate, in this case 33.3 per cent. The combination of a high guarantee and a low tax rate would have resulted in
a very high break-even level of $9,000. In 1964, 68 per cent of all families and
17
individuals in the U.S. would have been eligible to receive some payments. As a result the plan would have
had a gross cost of $155 billion; of this, $51 billion would actually have been redistributed, and of this net
cost, $28 billion would have gone to the non-poor.
Such costs would appear to make this NIT impractical. It is important to note, however, that a NIT or other
income security payments do not necessarily imply an expansion of the government sector at the expense of
the private sector. Payment of cash benefits does not involve the government in either the production of
goods and services or expenditure upon goods and services. Transfer payments increase the purchasing
power of private households - the money is spent on private goods which are privately consumed. The
growth of the "welfare state" means a growth in the ratio of taxes to national income, but it does not
necessarily involve an increase in the size of the public sector (Samuelson, Hancock and Wallace, 1970, p-
162), apart from the costs involved in administering transfer programs. But concern might still be expressed
with the behavioural impact of increased taxes and the guarantee of a minimum income.
Within OEO, discussion of NIT proposals centred on the issues of cost effectiveness, of total cost and of
directing assistance to those most in need. Among political decision makers there was concern with the effect
on labour supply of extending cash assistance to the working poor. This was the subject of debate and
controversy as substantial reductions in labour supply could significantly increase the cost of a negative
income tax scheme. For example, would large numbers of people above the break-even level decrease their
hours of work so as to become eligible for payments or would some give up work entirely, in order to live on
the guarantee? A high withdrawal rate raises the additional concern that those on low wages would be little
rewarded for their work effort. Those who had been unemployed or sick might not be encouraged to rejoin
the workforce especially if their usual work was unpleasant or if the cost of looking for work was high, or if
they felt that looking after their children, say, was more rewarding. Decreases in labour supply, by decreasing
pre-allowance income, could increase the number of persons eligible for a NIT and increase the amounts
payable. Not only would the cost of a NIT scheme itself be affected by reductions in labour supply, but the
social, non-budgetary cost in lost production could be substantial. As well, if a NIT reduced work incentives
the anti-poverty objectives of the scheme would be undermined by weakened labour market ties and reduced
earned income.
An implicit concern was with the social and political acceptability of such assistance. Indeed, the reason
families headed by men had generally been excluded from public assistance was precisely the fear of
impairing their incentive to work
19
a normal good - as income increases, demand for leisure increases. Therefore, it is expected that increased
income will be divided in some manner between increased purchases of both more market goods and more
leisure. Since increased leisure is equivalent to decreased labour supply, this income effect is expected to be
negative in that it tends to bring about changes in labour supply in the opposite direction to changes in the
wage rate.
Changes in social attitudes or the flexibility of working hours, for example, could lead to quite dramatic
changes in the patterns of labour supply response. Such changes are not separately specified in this analysis.
Some exogenous influences can, however, be taken into account, including the impact of government income
taxes and transfer payments. In the case of a GMI or a NIT, the changes in economic incentives are derived
from the guarantee and the withdrawal rate. As indicated above, any guarantee will increase income and
would be expected to have a negative income effect, thus reducing labour supply. Although an individual's
guarantee will be reduced as hours of work increase, this change is caused by the withdrawal rate rather than
the guarantee itself. Therefore, it is assumed that the guarantee has no substitution effect. In the case of the
withdrawal rate, changes can be viewed as changes in the wage rate, so that higher withdrawal rates are
equivalent to lower net wage rates. Therefore, the positive substitution effect would be expected to result in a
decline in labour supply. The income effect of the lower net wage rate would be expected to work in the
opposite direction, with people attempting to increase their labour supply in order to restore their previous
incomes. Therefore, under a guaranteed income there will be an income effect due to the guarantee that will
tend to reduce labour supply, a substitution effect due to the withdrawal rate that will also tend to reduce
labour supply, and an income effect due to the withdrawal rate that will tend to increase labour supply. In
aggregate, however, the withdrawal rate can only serve to decrease the effective guarantee, so that the
negative income effect of the net transfer must dominate. In theory, there is an unambiguous work
disincentive under a GMI.
Figure 3 overleaf illustrates some of these theoretical assumptions, through the example of a hypothetical
worker capable of earning $2 an hour. For simplicity it is assumed that all hours worked are paid at this
ordinary time rate. At $2 an hour, the worker can choose to be situated anywhere on the line OA (his
"opportunity set"), but initially the worker is in equilibrium at point X, where he works forty hours a week
and receives a weekly income of $80. Sets of indifference curves can be drawn, each representing a series of
bundles of income and of hours of work between which the worker is indifferent,
21
i.e. his enjoyment of the possible combinations of work and income is the same at all points along any one
curve. But given a wage rate of 72 an hour, the worker can only achieve the level of enjoyment represented
by indifference curve Io, and only at point X. He is then offered a negative income tax plan that, in this
example, offers him $60 a week if he has no earned income and has a withdrawal rate of 50 per cent, giving a
break-even point C with a total earned income of $120 per week. To the left of this point C, the worker
receives no payments. The opportunity set now facing the worker is BCA rather than OA, and he chooses
point Z on indifference curve Il where his hours of work and earned income have decreased, and his total
income has increased. The increase in total income is measured by the vertical distance between X and Z,
and the decrease in hours worked is measured by the horizontal distance between X and Z.
In this example the reduction in hours of work from X to Z can be divided into an income effect and a
substitution effect by drawing line DE parallel to AO and tangential to the higher indifference curve I1, at Y.
Since DE is parallel to AO, the slopes of the lines (i.e. the wage rates) are the same at all points along both
lines. The distance DO between these parallel lines therefore shows the payment that would yield as much
satisfaction as the original negative income tax plan if the withdrawal rate were zero. The horizontal distance
from X to Y is the net income effect of the guarantee and the tax on hours worked, since the wage rate or the
price of leisure is the same at both points. The horizontal distance from Y to Z is a measure of the pure
substitution effect of the tax rate only, since the level of satisfaction is the same at both points. A guarantee
of $60 a week with no tax would enable the worker to reach an indifference curve lying above I1. In
summary, as Figure 3 is drawn, both the income effect of the guarantee and the substitution effect of the
withdrawal rate will tend to reduce the amount of work supplied, and will outweigh the income effect of the
withdrawal rate. Figure 3 illustrates only one specification of a negative income tax plan. The general
expectation from theory is that plans with higher tax rates would have larger substitution effects,but also
larger income effects. Similarly, it would be expected that the plans with the most generous payments would
cause the largest reductions in labour supply. It would also be possible to consider the impact of changes in
family income on the labour supplied by an individual member of a family unit if the family were thought of
as a single decision making unit having a collective indifference map.
However, the theory described above is too simple in a number of significant ways. The conventional
analysis is essentially static, so that, for example, the long run acquisition of skills and the process of
adjustment from one equilibrium to another are not considered. As a result it is assumed that individuals
22
offered a negative income tax plan will have complete understanding of the tax system and will make
instantaneous and costless adjustments to their new equilibrium level of labour supply. The static theory
should be modified by taking account of a number of dynamic considerations. The theory assumes that the
wage rate confronting each worker is exogenously given. It can be argued that a worker may change his
market wage in at least three different ways. First, he might temporarily reduce his hours in order to
undertake training that would increase his wage at some future time. Negative income tax payments might
make this easier through providing an income during the period of training. Second, such payments might
influence the length of time taken for job search. Third, such payments might lead to the substitution of more
agreeable though lower paid work for disagreeable work rather than the substitution of leisure for labour.
Thus earnings would fall more than hours of work. Similarly, a guaranteed income could produce a shift to
working no overtime or to working part-time, which would change effective wage rates.
The model could also be expanded to take account of "unpaid work", such as home production and services
and educational activity. Mincer (1962) showed that extra income may be used to purchase labour saving
appliances, home help or convenience foods, and as a result, when income increases, unpaid work may be
reduced rather than paid work. Becker (1965, pp.495-517) has argued that unpaid work should not be
considered simply as a commodity for consumption, but that its value can be measured in terms of time, and
the consequent forgone income.
Consideration of these factors is particularly important when analysing the labour supply behaviour of
married women and teenagers (Edwards, 1980, pp. 6-9). A further factor that needs to be taken into account
is the influence of preference differences. In contrast to the simple consumption theory outlined above, it
may be useful to distinguish among three general "goods" - leisure, current market goods consumption, and
asset accumulation. Greenberg and Kosters (1973, pp. 19-22) argue that preference for savings relative to
leisure results in a systematic relationship between levels of non-employment income and work effort that
must be taken into account in estimating income effects. Income generated from accumulated savings would
tend to depress labour supply, but there would also be a preference-induced tendency for high levels of work
effort. Greenberg and Kosters conclude, interestingly, that "neglecting the influence of preference differences
may lead to empirical results that fail to conform to the predictions of theory".
Broader objections may be made to this approach to work incentives, and it may be argued that this model of
labour supply behaviour is not realistic. Economic theory does not separately
23
specify and take into account sociological aspects of commitment to work. Cohn (1979, p.264) has noted that
"the assumption that man works for reasons other than income is a cornerstone of the sociology of work.
Several early writers ... considered the need to work a basic instinct of man. Maslow (1954) emphasized the
importance of work in the process of 'self-actualization' and the development of self-esteem .... Early
theorists focused on the non-social aspects of the need for steady activity and the expression of both
creativity and productivity". That is, just as all unpaid work should not be considered as yielding only
satisfaction and no income, all paid work should not be considered as yielding only income and no
satisfaction. Changes in sociological and social-psychological factors are equivalent to exogenous shifts in
the static relationships in the above economic analysis and may operate to confound the predictions of the
work-leisure choice hypothesis. For instance, if work has greater value than leisure (i.e. leisure is a "bad"),
the indifference curves as shown in Figure 3 may no longer be of the conventional downwards-sloping,
convex shape, but might slope upwards, or the individual might have multi-dimensional preference
orderings. As long as the need for income dominated, a worker may behave as indicated in Figure 3, but at
higher levels of income, the individual could switch to an unconventional indifference map (Lutz, 1980, pp.
505-516). Attitudinal variables that are usually not separately specified in econometric models include
various unmeasured traits affecting wages, income, and labour supply, e.g. quality of education, training,
work experience, mental and physical health, and personal traits such as ambition, a desire to retire in
comfort or to leave abundant material goods to one's heirs, or dislike of spending time at home. Income
maintenance researchers have noted that sociological literature has not developed a conceptual approach that
would allow empirically based predictions about the effects of attitudinal variables on labour supply in the
NIT context. Methodologically weak social-psychological variables and relatively low reliabilities of
resulting scales have not assisted the consideration of attitudinal factors in labour supply theory (Wright,
1977, pp.341-342).
1.4 Social Experimentation
The above discussion of the theoretical model of labour supply indicates that there could rarely be an
unambiguous prediction of the quantitative effect of the introduction of a negative income tax. Even when
there is a clear prediction as to the direction of the change in the supply of work effort, no precise measure of
this change can be provided. Policy makers required accurate information about the likely labour supply
effects of a NIT. For instance, a 10 per cent reduction in work effort overall could imply either that all
workers reduced their hours
24
by 10 per cent, or that 10 per cent gave up work altogether, or some permutation of these. The precise nature
of the labour supply response would be likely to have a significant impact on the political acceptability of a
NIT plan. Accurate estimates of labour supply effects were required. Alternative sources of such estimates
included sample surveys, econometric studies and social experiments.
Empirical studies of the disincentive effects of taxation have been available since the 1940s. These studies
covered a wide range - Sander had investigated the influence of tax rates on 160 American executives;
Davidson concentrated on a much smaller sample of doctors; the Report of the U.K. Royal Commission on
the Taxation of Profits and Income had dealt with a large sample of workers who had some opportunity to
vary their labour supply in response to changes in income tax; Break surveyed some 300 self employed
accountants and solicitors; other studies looked at the effects of the PAYE method of tax collection, and
attitudes to work, and beliefs about the tax system. In general these studies showed many similarities in their
findings. There was no clear evidence of marked disincentive effects associated with tax increases, and there
was some evidence that there were both incentive and disincentive effects for small groups which by
offsetting each other, tended to reduce the net tax effect on aggregate labour supply (O.E.C.D., 1975, pp.29-
51).
There are a number of problems associated with such approaches to determining work disincentives. The
primary problem with these studies was their lack of generality. Some were of very small samples, and in
many there was a tendency to concentrate on executives and professionals, rather than on the whole labour
force or even the poor. Moreover, studies in the U.K. or other countries in the 1950s could be considered of
little relevance to the situation of the U.S. in the 1960s. As well, people may not possess accurate knowledge
of the tax system, so that their responses in such interviews may not reflect what they actually would do in a
real situation once their misconceptions had been removed. In survey work it is usually not possible to
untangle the effects of tax alone from other factors such as the rate of inflation. Interviewees cannot be
expected to operate like regression models precisely measuring the partial effects of each of a host of
variables. Of course, it should be noted that such studies provided evidence only about the effect on work
incentives of changes in positive tax rates and were not specifically relevant to the negative income tax
approach under consideration by the Office of Economic Opportunity. Their policy relevance was therefore
limited.
25
Econometric studies of labour supply involve the specification of the relationships betwen economic
variables, the collection of data which can be used in the estimation of the parameters of these relationships,
and finally the application of some statistical technique to obtain numerical values for these parameters. In
the investigation of work incentives, it is necessary to specify labour supply equations, obtain empirical
counterparts to the variables used in these equations and choose an estimation method. Having estimated a
labour supply function, a researcher can proceed to analyse the effect of the negative income tax by
evaluating the estimated function at the pre-tax and post-tax levels of the relevant explanatory variables.
Such simulations can assist the policy maker by providing information about the various combinations of
work disincentives, number of recipients, budget cost, and the extent of income redistribution offered by NIT
plans under consideration.
There were many econometric studies available to researchers and policy makers in the Office of Economic
Opportunity. These studies were based upon labour market experience in the U.S.A. and employed such data
sources as the 0.1 per cent sample of the 1960 U.S. Census, the 1967 Survey of Economic Opportunity and
the Current Population Survey of the U.S. Bureau of the Census. Because variations in the choice of
explanatory variables, parametric representation, data, or estimation method led to variations in a study's final
results and its policy implications, the U.S. econometric studies produced widely differing estimates of
income and substitution effects. The wide variations in the estimates suggest that the results of such studies
should be treated with caution. The main contribution of such studies may be in the process of refining
econometric models and simulation methodology. Moreoever, even if there was general agreement on these
technical matters, the relevance of these econometric studies would still be open to question. As discussed
previously, the conventional theoretical analysis of labour supply contains several crucial assumptions and
over-simplifications, and is essentially static. The data sources are cross-sectional, not longitudinal.
Description of dynamic adjustment to NIT changes is limited in such models.
As Katz and Jackson (1978, p.201) have noted, "It becomes important then, particularly in a period when
budgetary funds are restricted, to thoroughly research the impact of any new ... schemes, to establish which
of the policy objectives will be met in practice, which will not, and to discover any unintended side effects
that may arise". That is, in order to know how people actually respond to a specific program it is necessary to
set that program up and observe its effects.
26
Social experimentation attempts just that. It seeks to measure the effects of changes in policy variables by
applying these changes to human populations in conditions of controlled experimentation similar to those
used in the physical and biological sciences. In a social experiment, one or more treatments (programs, NIT
plans, etc.) are administered to some set of persons or other units drawn at random from a specified
population. Observations (or measurements ) are made to learn how or by how much some relevant aspect of
their behaviour following treatment differs from like behaviour on the part of an untreated control group also
drawn at random from the same population (Riecken and Boruch, 1974, p.3).
Such experiments have been common in psychology; for instance, experiments with teaching practices in
education, and studies of the effectiveness of advertising. The distinguishing feature of the social
experiments under consideration is time - changes in behaviour over a considerable period were studied.
Examples of new, large scale social experiments in the United States, apart from the negative income tax
experiments, include:-
(i) supported work experiments, testing whether people who traditionally are hard to employ can
be trained both technically and psychologically for employment;
(ii) health insurance experiments, studying how the demand for medical care changes as the cost of
care is reduced;
(iii) electricity rate experiments, seeking to measure the response of residential users to variations in
the rate of electricity charges; and
(iv) experimental housing allowance programs, encompassing demand, supply, and administrative
experiments, and considering the possible effects of a national program of cash housing
allowance.
Rivlin (1974, pp.346-354) has classified social experiments into four types by the kind of response being
measured - the response by "micro-units" (e.g. the income maintenance experiments), the response by
"macro-units" (such as market response in the housing allowance experiments), the change in the production
function of some public service, and the response to a particular type of service. It may be more useful
however simply to classify experiments by whether direct response effects are sought on the household
supply side, the household demand side, or from the institutions providing the service (Ferber and Hirsch,
1978, p. 1389).
27
Social experimentation is oriented towards public policy and usually a specific government program. Interest
in the concept of social experimentation had grown out of the "quiet revolution" in planning of the early
Sixties. This involved a commitment to measuring social needs and evaluating social programs, and was
embodied in the Planning-Programming-Budgeting System (PPBS) introduced into the Department of
Defence in 1961. By 1967-68, evaluation of social programs had become an interest of the office of Assistant
Secretary for Planning and Evaluation in HEW, and the Office of Research, Plans, Programs and Evaluation
(RPP&E) in OEO. In these agencies social experimentation was seen as a new and potentially effective tool
of evaluation.
The advantages claimed for the experimental approach are substantial. Non-experimental analyses of human
behaviour may suffer from lack of relevant data and are influenced by uncontrolled or uncontrollable factors.
The results can be no more than correlational. It is asserted that a properly designed social experiment can
produce inferences of superior dependability about cause and effect. A social experiment is the best method
of distinguishing policy effects from non-policy factors such as social and economic developments that may
affect the entire population. Random selection of sites and participants, random allocation of participants
between experimental and control groups, and the application of advanced statistical methods, such as
multiple regression analysis, will ensure that any differences in behaviour between the experimental group
and the control group can be accurately attributed to the policy being tested. As well, the nature of an
experiment focuses the attention of researchers and policy makers on theory and on program design. Like a
demonstration project, a social experiment constitutes a testing of a program's operational feasibility, and
supplies information on the administrative aspects of policies. This practical orientation can provide
unanticipated lessons for future program staff. A final advantage sometimes claimed for social
experimentation is that some issues may be removed from political controversy into the supposedly neutral
zone of scientific analysis.
28
There are a number of problems associated with the use of social experimentation in public policy,
particularly in regard to:-
(i) cost;
(ii) technical aspects of experimental design and operation;
(iii) policy relevance; and
(iv) ethical issues.
Cost is a major consideration in experimentation, and account must be taken of the number of staff on a
project, the extensiveness and frequency of data collection, the cost of administering the treatments, the cost
of the treatments themselves, e.g. negative income tax payments or housing vouchers, and the duration of the
experiment. For instance, the U.S. Housing Allowance experiments are estimated to have cost around $200
million. Such costs may still be moderate in relation to the long term national cost of an actual program.
Social experiments are not necessarily high cost and long term - there have been numerous U.S. educational
experiments costing less than $50,000. Alice Rivlin has noted, "Experiments may be expensive compared to
traditional forms of social research, but even the costs of major experiments are small compared with the
costs of social policies that do not work, or that might have been significantly more effective if experimental
results had been available" (in Katz and Jackson, 1978, p.207).
A number of problems may arise in the design of a social experiment. The work incentive experiments
provide many examples of these difficulties. In a large scale experiment the selection of the combination of
treatments to test will be affected by the ultimate feasibility of alternative programs, the cost and the need to
straddle all the possibilities of a national program. As a result of cost constraints, estimates of experimental
responses may be based on a comparatively small number of observation points. This limits the reliability of
estimates of causal relationships, unless these relationships are simple and linear. The responses of families
to these treatments may not be independent of their social and economic
29
characteristics or of general economic conditions. The specifying theory should define the expected response
effect accurately. For instance, labour supply responses could be measured in terms of labour force
participation rates, employment rates, hours of work or earnings from work. Different measures of response
may be relevant to different groups, such as dependent spouses and children, sole parents, the unemployed or
the self employed, so that the significance of the overall results of an experiment may depend on which of the
responses is studied. The experimental program also may cause other unexpected social responses that need
to be measured in assessing the real costs and effects of a policy change.
The site selected for the location of an experiment should conform to standards of representativeness so that
the results may be generalisable to the national population. This is the issue of external validity. The site
must contain sufficient eligible families in order that cost may be reconciled with coverage of all possible
eligible types. Issues of cost and practicality may conflict with those of sample design. The eligibility
conditions may be used to limit sample size and the number of treatment cells, but, for instance, limiting the
sample by income size may bias the estimates of response effects. A similar problem may arise when cost
considerations affect the allocation of the sample between control and experimental groups. Control groups,
to which no payments are made, are cheap. Low payment cells are similarly attractive, but consequent
estimates of response effects may be biased.
A number of operational problems may arise during the execution of a social experiment. Attrition bias is a
potential problem in longitudinal surveys - the labour supply of some families, e.g. transient farm workers,
may be systematically related to the factors that cause them to drop out of the experiment. Alternatively,
when a sample is maintained through time regardless of changes in the composition of the population,
geographically stable families may be over-represented or the experimental treatment, a generous NIT plan,
for instance, might influence some families to stay in an area when otherwise they might not. A major
problem of interpretation is associated with the length of the experiment - do families respond differently to a
three year experiment than they would to a permanent program? The limited duration of an experiment itself
might affect labour supply. For male family heads with a permanent job, an experiment of two or three years
duration may have smaller effects than a permanent NIT program. For other family members, a temporary
experiment may encourage decreased labour supply in the experimental period. The pattern of responses may
not be detectable in an experiment of relatively short duration.
30
Whether the time period that controls labour supply decisions is one, three, five or ten years or longer is not
known. In an experiment this may be further complicated if households do not know the duration of cash
payments with certainty, or if an experiment produces the assumption that a permanent NIT will be
introduced (Ferber and Hirsch, 1978, pp. 1394-1395).
Individual responses may be affected by community norms. An experiment in a saturation site, where all
families are eligible for a treatment, may produce different results from an experiment in which there are a
small number of eligible families in a number of communities. Responses to an experiment using selective
enrolment may be biased downward, since they are based on attitudes in communities which have not been
affected by the proposed widespread social program. The presence of pre-existing welfare programs would
also complicate theoretical analysis and comparison of an experiment with a program. The general effect of
welfare is to make the observed differences between experimental and control groups smaller than they
would otherwise be. The underestimate occurs primarily because welfare payments may induce some
withdrawal of work effort in the control group. On the other hand, results derived from an experiment in the
presence of welfare are perhaps more appropriate estimates of the net effect of a real national NIT program
that may be superimposed in some way on existing income security arrangements.
A major potential problem with social experimentation is the Hawthorne effect, which arises from the
experimental subject knowing that he is a member of a specially treated group, thereby altering his
behaviour. The Hawthorne effect was identified during a study of the effects of factors in the physical
environment on workers, carried out at the Hawthorne Works of the Western Electric Company in Chicago
between 1927 and 1932. It was found that any experimental attention affected worker's behaviour, e.g. both
increasing and decreasing illumination in the works led to rises in output (International Encyclopeadia of the
Social Sciences, 1968, Vol. 1, p.241). The Hawthorne effect may jeopardize the internal validity of an
experiment as it results in specious differences between control and experimental groups. For instance,
experimental families, knowing that their responses will affect a national welfare program, may consciously
behave 'responsibly'. This constraint may not operate once a national program is introduced. These
operational and design problems may affect the internal or external validity of an experiment. Even the best
feasible experiment usually will involve a set of compromises and approximations designed to minimise
these problems.
31
Another problem associated with the experimental approach is the policy relevance of its results. In
particular, the time delay associated with an experiment may undermine the importance of its conclusions.
For instance, the NIT experiments involved the initial consideration, design, pretesting, the experiment itself,
analysis and reporting of the results. The New Jersey experiment was under consideration from 1967, started
in 1968, and the first volume of the Report was published in 1976. During this time the relevance of the
experiment changed significantly as the political feasibility of a negative income tax waxed and waned. An
associated consideration is the cost of delaying social action until an experiment is concluded. Would it be
reasonable to delay reform of the U.S. welfare system until the results of the NIT experiments were fully
analysed? This suggests that social experiments may be used as alternatives to real action.
Finally, in analysing social experimentation as part of the policy making process, attention should be paid to
ethical desiderata, such as protection of a subject's privacy, confidentiality of data, and avoidance of harmful
treatments or side effects. An experiment may be considered as a manipulation of people's resources and
lifestyles. This manipulation, even if well intentioned, poses several dilemmas. It is easy to assess the ethical
status of 40 years of nontreatment for a group of syphilitics in an experiment under U.S. Public Health
Service auspices, or the administration of placebos to randomly selected applicants for birth control pills in a
Texas family planning clinic, resulting in several unwanted pregnancies (Rivlin and Timpane, 1975, p-2). It
is more difficult to evaluate an experiment in Panama, testing the hypothesis that protein supplements in the
diets of pregnant women and pre-school children can reduce or eliminate retardation in cognitive ability at
school age (Riecken and Boruch, 1974, p.16). The moral ambiguity of the failure to provide benefits to the
control group is particularly salient in this example.
Ethical concerns may have very direct effects on the central issues of an experiment. For example, in the
New Jersey experiment, despite initial conditions of confidentiality, the experimenters agreed to a television
network's proposal for free and favourable publicity. Some treatment families were invited to be interviewed
on television; a number volunteered and signed releases accepting responsibilty for the consequences of the
interview. One man who appeared on the program was subjected
32
to ridicule by his fellow workers and his foreman for appearing on television and for being described as
"poor". He had a fight with his foreman and was sacked. After a period of unemployment, his wife left him
and applied for maintenance. Being unemployed, he could not pay and was threatened with imprisonment.
The story ended "happily" in that the man did obtain a new job and was able to pay maintenance. This
relaxation of the initial conditions of confidentiality had very damaging, if unanticipated, consequences for
the individual involved. Presumably it also had a significant impact on his labour supply, the focus of the
experiment, and a permanent effect on his family stability.
This also suggests that it is possible to question the attitude that the effects of guaranteed income on family
behaviour merely are phenomena to be objectively observed. If NIT payments do weaken family cohesion or
labour market ties, does responsibility for experimental subjects extend past the years of treatment? It may be
noted that social experimentation is no different in effect from social programs generally, except that
experiments set up different risks and opportunities for persons otherwise similarly situated and experimental
beneficiaries are treated as means rather than ends. The poor in particular may be used disproportionately in
experiments as they are the focus of social welfare programs. Yet there could be policy relevance in an
experiment testing the effect of increased marginal tax rates on the work incentives of middle and upper
income earners. Such an experiment seems unlikely.
The issue of confidentiality is a major consideration of social surveys and experiments. In the NIT
experiments, the concern to protect the privacy and confidentiality of experimental families was challenged
on a number of occasions. There were attempted intrusions into the New Jersey data by a grand jury, two
county welfare departments, the General Accounting office, and the Senate Finance Committee. Some of
these were intended to detect welfare fraud and to cross-check experimental income statements with tax
returns. A large number of rights and interests may conflict in any such case - the right of the subject to
confidentiality and the responsibility of the researcher to protect it, the responsibility of authorities to detect
crime and fraud and the right of society to be protected from fraud, the right of society to the kind of
knowledge useful for social policy, and the right of public access to information produced from government
expenditure. None of these rights is asbsolute, nor are they all inevitably in conflict.
33
Rivlin and Timpane (1975) suggest a number of general ethical questions that should be asked about
experiments (pp.7-13), and propose a "Checklist of Ethical Issues in Social Experiments" (pp.17-19). The
questions suggested include:-
(i) How is it possible to obtain informed consent when the unit of treatment or analysis is an
institution rather than an individual?
(ii) What consent is necessary when there is little risk to the subject?
(iii) How can consent or a reasonable proxy be obtained from subjects incapable of consenting for
themselves (e.g. children)? What degree of unconscious coercion is involved in experiments
with prisoners or dependent groups?
(iv) How much information is necessary for the individual to give informed consent?
(v) Does the subject have the right to withdraw from the experiment?
(vi) What are the ethical obligations of the investigators in regard to the control group, or to persons
outside the experiment who are nevertheless affected by it?
(vii) What are the obligations of investigators in respect to actual harm that individuals may suffer as
the result of the experiment?
However, the principles adopted by an experimenter may simply be designed for the avoidance of practical
difficulties. The examples discussed above show that ethical concerns may interact with issues of
experimental design or may directly affect the quality of experimental results. It might be concluded that in
most experiments on people the ethics and the rules and procedures have very little to do with the welfare of
the subjects; they have much more to do with the ethics and the skills of the profession that is involved
(Rivlin and Timpane, 1975, p.175).
34
2. THE NEW JERSEY EXPERIMENT
2.1 Background
Origin and objectives: The middle and late Sixties were a gestation period for negative income taxation. By
1965, the Director of the Office of Economic Opportunity, R. Sargent Shriver, had become a spokesman for
negative income taxation, and in that year the OEO's budget proposal included a NIT to cost $4.7 billion as
the centrepiece of a comprehensive anti-poverty plan. However, President Johnson was unconvinced; there
was opposition in HEW, and within the General Accounting Office (GAO), the investigative arm of
Congress. The budget proposal was not accepted, but in 1967 a Commission on Income Maintenance
Programs was established. Yet within the OEO there was a definite belief that negative income taxation was
an idea whose time had come. The dimensions of labour supply response to a negative income tax was a
scientific question impinging on both socioeconomic behaviour and political needs. A social experiment
seemed to be precisely the way of meeting these concerns. As indicated previously, there are many problems
associated with social experiments. Despite this, the convincing simplicity of the two central concepts proved
timely - if people are poor, give them money, and if you want to discover the results of a social program, try
it out.
Mathematica Inc., a commercial research firm in Princeton, New Jersey, submitted a proposal for a graduated
work incentive experiment in December 1966. OEO was disposed to fund the experiment, but Shriver
insisted on the funding being made to the Institute for Research on Poverty (IRP) at the University of
Wisconsin, as he was unwilling to award so large a contract to a private, profit-making firm. As well, this
arrangement would avoid direct OEO involvement and thus hopefully forestall any Congressional or
Administration criticism. The Institute for Research on Poverty had been set up at the University of
Wisconsin with OEO funding, and the experiment was seen as a way of ensuring that IRP fulfilled its
expected functions. At the time, the University was rather wary of CIA activities and insisted on full IRP
partnership in design and operation of the experiment (Williams, 1972, p.12). The agreement was signed
between the parties on 30 June 1967, the final day of the fiscal year, and the day before Congress rose for the
summer. The IRP later signed a sub-contract with Mathematica Inc. to undertake the field operations.
35
It was decided to conduct a factual experiment based on a sample drawn from a homogeneous group in a
limited geographical area, rather than from a nationwide population sample. The population group chosen for
the experiment was the 'working poor', composed largely of able bodied, non-aged males with dependants.
The area chosen was the State of New Jersey in the urban northeast of the United States, within which three
experimental sites were established. It subsequently became necessary, in order to enable the sample to
contain an adequate number of non-Spanish speaking white families, to select a further site in Pennsylvania.
The four sites were Trenton, Paterson and Passaic, and Jersey City in New Jersey, and Scranton,
Pennsylvania.
The researchers involved in the experiment never agreed on or set down in advance a summary of what they
felt was the most likely outcome for labour supply. A retrospective summary of these expectations was
included in the Report of the experiment. According to Rees (1977, p.15), these were as follows:-
"We never expected able-bodied male heads of households to withdraw from the labour force in
response to temporary payments too small to support large families. We did expect some of them to
reduce their hours of work or to spend more time searching for new jobs when they lost or quit their
jobs. We expected some teenagers to return to school or to stay in school longer as a result of the
payments. We expected some working wives to leave the labour force in order to spend all their time in
household work.
On the whole, the reduction in labour supply we expected to find in the experimental group was in the
order of 10 to 15 per cent. We did not expect to find any differential effects by ethnic group. However,
we did expect to find that higher tax rates and higher guarantees would produce greater reductions in
labour supply."
Duration and cost: Families were enrolled in the four sites between August 1968 and September 1969. Field
operations were completed at the first experimental site, Scranton, Pennsylvania in September 1972. Thus the
duration of the experiment in each site was approximately three years. The total cost of the experiment was
$7,803,000 - made up of $5,428,000 for research and administrative costs and $2,375,000 for the transfer
payments.
36
2.2 The Sample and Experimental Design
Eligibility criteria: In accordance with the decision to focus on the work effort of healthy, non-aged males
with dependents, the following eligibility criteria were specified:-
(1) Each family had to contain a male between the ages of eighteen and fifty-eight at the time of
enrolment;
(2) The family income for the previous year had to be below 150 per cent of the 1967-1968 poverty
level;
(3) The head of the household could not be a full time student, or a member of the military services,
or be institutionalised;
(4) At least one adult in the family had to be able to work - that is, to have been gainfully employed
during the previous five years or to expect to be able to work in the next year; and
(5) the family had to have at least two members but did not have to include a child.
For the purposes of the experiment the official poverty lines devised by the Social Security Administration
(SSA), which were approximately equal to three times the cost of a nutritionally adequate diet, were revised
as it was felt that there was little analytical justification for using nutritional requirements alone as the basis
for judging need. Except for families of three persons, the SSA poverty lines were more generous than those
used in the experiment. The experiment's poverty lines were increased every year by the percentage change
in the consumer price index.
Sample selection: The procedure for selecting families to participate in the experiment involved identifying
potentially eligible families within a randomly selected sample of residents of poverty areas in the cities
chosen as sites. (In the first site, Trenton, an attempt was made to sample from non-poverty areas but this
practice yielded so few eligible families that it was discontinued for subsequent sites.) Potentially eligible
families were then interviewed in detail in order to determine income eligibility and to obtain base-line
attitudinal data. Table 2.1 provides details of the results of the sampling procedure for each city.
37
TABLE 2.1: RESULTS OF THE SAMPLING PROCEDURE BY CITY
Trenton Paterson- Jersey Scranton Total

Passaic City
Target Households 3,530 14,781 18,002 12,334 48,647

Eligible for Enrolment 137 446 548 382 1,513
Enrolment Attempts 137 446 413 320 1,316
- Moved or not
located 2 21 7 0 30
- No longer eligible 0 3 5 0 8
- Refused 9 40 11 2 62
- Not attempted 0 0 135 62 197
Total Enrolled 126 382 390 318 1,216
Total Final Sample 159 490 390 318 1,357*
* This total includes an additional 141 control families in Trenton, and Paterson-Passaic.
SOURCE: Kershaw and Fair, 1976, p.31.
On the basis of the interviews, families were assigned to one of four income strata - those with income at or
below the poverty line, those with income between 100 per cent and 125 per cent of the poverty line, those
with income between 125 per cent and 150 per cent of the poverty line, and those with income above 150 per
cent of the poverty line, who were ineligible. Eligible families were then randomly assigned to one of eight
experimental plans or to the control group in accordance with a sophisticated statistical design which
determined the number of families from each income stratum to be assigned to each group. This resulted in a
total, including the control group, of 27 experimental cells. Families were allocated to experimental cells or
to the control group as indicated in Table 2.2 below.
This design (the Conlisk-Watts allocation model) did not assign families uniformly across experimental cells
but took into account the cost per observation, the policy weight assigned to each plan, a family's break-even
level relative to the plan to which it was assigned, and the expected attrition rate of different cells. The design
was also based on the assumptions that the variance in earning behaviour would be lower in the treated cells
than in the control cells and that the response function would be continuous across cells. In effect, the
assignment model was an explicit weighting scheme to balance such factors as sample size against overall
expense and the relative expense of different experimental cells, and the policy relevance of specific
treatments against measurement of the entire range of treatments.
38
TABLE 2.2: ALLOCATION OF FAMILIES TO EXPERIMENTAL CELLS OR CONTROL GROUP.
Income Stratum (% of poverty line)
Experimental Plan
(Per cent guarantee -
withdrawal rate) Less 100% - 125% 125% - 150% Total
than 100%
50-30 5 31 12 48
50-50 29 37 5 71
75-30 30 14 50 94
75-50 5 57 36 98
75-70 13 51 0 64
100-50 22 34 20 76
100-70 11 26 33 70
125-50 50 8 80 138
Total: 165 258 236 659
Control 238 165 247 650
Total 463 423 483 1,309*
* This total differs from the 1,357 families enrolled due to sampling shortfall.
SOURCE: Kershaw and Fair, 1976, p.104
Initially 1,216 families were enrolled, but a further 141 control families were subsequently enrolled from
Trenton and Paterson-Passaic, giving a total sample of 1,357. Not all eligible families were enrolled, as some
refused, some had moved or could not be located, and some were no longer eligible by the time of enrolment.
In Jersey City a number of Spanish speaking families were randomly deleted from the sample in order to
maintain ethnic balance, and in Trenton a number of families were deleted because sample cells were filled.
Characteristics of the sample: The income and family composition characteristics of those families eligible
for enrolment in the experiment were compared with the only data source available - the 1960 Census of
Population. On the basis of this comparison it was concluded that the sampling procedures provided a final
experimental sample representative of all families in these cities with similar income and family composition
characteristics. The ethnic composition of the final sample was roughly one third for each of the three major
groups,
39
as shown in Table 2.3. An examination of additional characteristics of the sample, including family size, age
of head, education, earnings and non-employment income, employment status and housing status did not
reveal the kind of differences between the experimental and the control groups that could be expected to
cause very different behavioural responses simply because of the assignment strategy. There were also found
to be only minor differences between families that refused enrolment and families that were enrolled. There
was one major difference which may be attributed to the experiment itself - the more generous the plan to
which families had been assigned, the lower the rate of refusal.
TABLE 2.3: ETHNIC COMPOSITION OF SAMPLE BY CITY
Group Trenton Paterson- Jersey Scranton Total

Passaic City
Black
- Treatment 53 109 118 2 282
- Control 52 84 81 1 218
- Total 105 193 199 3 500
White
- Treatment 14 30 25 162 231
- Control 11 18 27 153 209
- Total 25 48 52 315 440
Spanish-Speaking
- Treatment 20 137 55 0 212
- Control 9 112 84 0 205
- Total 29 249 139 0 417
All Ethnic Groups
- Total 159 490 390 318 1,357 (a)
(e) Includes original 1216 families and 141 additional control families in Trenton, Paterson and Passaic.
SOURCE: Kershaw and Fair, 1976,p.36.

40
Experimental treatments: The guarantee levels were specified as percentages of the poverty line, adjusted for
family size, and increased each year by the percentage increase in the consumer price index. Initially three
levels were chosen for use in the experiment - 50 per cent, 75 per cent and 100 per cent. Three withdrawal
rates were also chosen - 30 per cent, 50 per cent and 70 per cent. Seven combinations of withdrawal rates and
guarantee levels were originally chosen; however, by the end of 1968 it was decided to add a fourth
guarantee level (125 per cent). This resulted in eight negative income tax plans being used in the experiment,
as shown in Table 2.4.
TABLE 2.4: ALLOCATION OF FAMILIES BY TREATMENT COMBINATIONS USED IN THE

NEW JERSEY EXPERIMENT.
Guarantee Withdrawal Rate (Per cent)

(Per cent of poverty line) 30 50 70
50 48 71 -
75 94 98 64
100 - 76 70
125 - 138 -
SOURCE: Kershaw and Fair, 1976, p.13.
Each of these plans was subsequently assigned a weighting based on an estimate of how important it was in
terms of national policy. Thus the 75-50 plan and 100-50 plan were assigned the highest weights, while plans
at the extremes received low weights.
Sample Attrition Rate: During the three years of the experiment 273 family units or 20 per cent of the
original number of families dropped out of the sample. In fact the original sample was designed with an
estimated attrition rate of 20 per cent. As was expected, the rate was higher for control families than for
experimental families, and also appeared to be related to the guarantee level and withdrawal rate - low
guarantee levels and high withdrawal rates were associated with high attrition rates.
Administrative feature s of the experiment: The administration of the experiment was primarily concerned
with the interviewing and transfer payment processes. Interviews administered at three-monthly intervals
provided the main source of data for the experiment. In addition to the quarterly interviews there were eight
one-off interviews including the interview to establish eligibility and to collect base-line data and a
41
follow-up interview three months after the last transfer payment. Every four weeks each experimental family
filled out an income report form on the basis of which their payments were calculated. The family then
received the calculated amount in one cheque each fortnight. In addition to the NIT transfer payments every
family received a fortnightly amount of $10 in return for mailing in the income report form. Control group
families were paid $8 a month for returning a card giving their current address. Both groups were paid $5 for
each interview.
The New Jersey experiment had a number of administrative features in common with the other U.S. work
incentive experiments. These are detailed in Appendix One. There were also a number of shared operational
features - dealing with the definition of the family, the definition of income and the accounting period - that
affected the payments for which families were eligible. The rules of operation for the four experiments are
summarised in Appendix Two.
2.3 Findings
Data analysis: As noted in the Summary Report of the New Jersey Graduated Work Incentive Experiment
(U.S. Department of Health, Education, and Welfare, 1973, p.14), the results of the New Jersey experiment
are complex, somewhat ambiguous, and difficult to summarise. The central concept of labour supply
response was seen to have at least four dimensions; labour force participation, employment, hours worked
and family earnings. In order to explain the variations in these dimensions, which constituted the findings of
the experiment, response or dependent variables were statistically related to treatment variables and control
variables using regression techniques. All of the effects were discussed in the form of differences between
the value of a response variable (e.g. hours worked per week) for treatment families and the value of the
same variable for control families.
The subsample on which most of the anaysis was undertaken consisted of a relatively homogeneous group of
693 families, who continued throughout the experiment as married couples and who continued to respond to
the experimental questionnaires. Table 2.5 provides details of the characteristics of the continuous husband-
wife sample. Most of the analysis was based on the central two years of the experiment, i.e. on the third to
the tenth quarterly interviews. This was done in order to avoid the possibility that the experimental effects
would be confounded with any transitory effects arising from the beginning of the experiment or the
anticipation of its end.
42
TABLE 2.5: CHARACTERISTICS OF CONTINUOUS HUSBAND-WIFE SAMPLE
Spanish
Total Experimental Plan All White Black
Speaking
693 310 234 149
50 - 30 27 13 8 67
50 - 50 32 11 12 9
75 - 30 60 22 23 15
75 - 50 65 24 25 16
75 - 70 48 24 21 3
100 - 50 44 20 14 10
100 - 70 53 21 17 15
125 - 50 96 46 31 19
Controls 268 129 83 56
Site
Trenton 60 12 38 10
Paterson-Passaic 158 30 59 69
Jersey City 236 32 134 70
Scranton 239 236 3 0
Income Stratum
(% of poverty line)
Less than 100% 179 71 53 55
100% to 125% 237 105 85 47
125% to 150% 277 134 96 47
SOURCE: Watts and Rees, 1977, p.35.
The research team analysed the results for three groups of participants - married men, married women, and
the family as a whole. The analyses of the three groups were done simultaneously by different members of
the research team, and although the methods used had important features in common there were also
important differences and the findings were not always
43
directly comparable. The analyses were carried out in steps of varying complexity. The first step was to
calculate the differences in the various measures of work behaviour between experimental and control
groups. The next step was to calculate a set of simple multiple regressions with the labour supply measures as
dependent variables. These were done separately for each time period and ethnic group. Third, a set of
regressions were run that controlled for normal wage and normal income as a fraction of the poverty level,
allowed for nonlinear wage effects, and analysed the experimental plans separately. Finally, regression
analysis was undertaken, discarding the suspect earnings variable and eliminating experimental plans that
were less generous than welfare.
The full findings resulting from all these analyses are not discussed below. Instead, two of the more simple
analyses that of the differences between the means of the experimental and the control groups, and that
reflecting the distinctions between experimental groups and between different types of families - are
summarised. The methods of data analysis used in all the U.S. work incentive experiments were very similar
and are detailed in Appendix Three.
Labour supply response -- mean treatment-control differentials: Tables 2.6, 2.7 and 2.8 below show, for
husbands, wives and the entire family, the control family mean, the treatment family mean and the absolute
and percentage differentials between these two means for the four measures of labour supply. Results are
reported separately for each ethnic group. In summary, for husbands, there were no findings to indicate a
significant reduction in labour supply resulting from the experimental payments. All the differentials between
the treatment and control families were quite small in both absolute and relative terms - none exceeded 10
per cent of the control mean and most were less than 5 per cent - and none was statistically significant.
Moreover, there was greater labour supply among black husbands in the treatment group than in the control
group. It was also found that approximately 95 per cent of husbands when employed worked close to full
time, 37 to 40 hours per week. For wives, the labour supply differentials were predominantly negative. Their
reductions in labour supply were small in absolute magnitude, but because of wives' initial low levels of
market labour supply, these reductions represented relatively large percentages, except for black wives. Even
so, the reductions in hours worked per week and earnings per week were not statistically significant.
44
TABLE 2.6: HUSBAND TOTALS: REGRESSION ESTIMATES OF DIFFERENTIALS IN LABOUR

FORCE PARTICIPATION, EMPLOYMENT, HOURS, AND EARNINGS FOR
QUARTERS 3 TO 10 (a)
Labour Force Hours

Participation Employment Worked Earnings
Rate (b) Rate per week per week
White
Control group mean 94.3 87.8 34.8 100.4
Absolute differential -.3 -2.3 -1.9 .1
Treatment group mean 94.0 85.5 32.9 100.5
Per cent differential -.3 -2.6 -5.6 .1
Black
Absolute differential 0 .8 .7 8.7
Per cent differential .0 .9 2.3 9.3
Spanish-speaking
Absolute differential 1.6 -2.4 -.2 5.9
Per cent differential 1.6 -2.7 -.7 6.4
a) The data for these tables consist of 693 husband-wife families who reported for at least 8 of the 13
quarters when interviews were obtained. The reported differentials in each measure of labour supply
are the experimental treatment group mean minus the control group mean, as measured in a regression
equation in which the following variables were controlled: age of husband, education of husband,
number of adults, number of children, sites, pre-experiment labour supply variables of the husband.
These means and the associated controltreatment differentials may therefore be interpreted as
applicable to control and treatment groups with identical composition in terms of these variables. Per
cent differentials are computed using the mean of the control as base.
(b) Official government labour force concepts, used in the experiment, define someone as in the labour
force if he is employed or unemployed. Someone is unemployed if he is actively seeking employment,
waiting recall from layoff or waiting to report to a new wage or salary job.
SOURCE: U.S. Department of Health, Education, and Welfare, 1973, pp. 22-23.
45
TABLE 2.7: WIFE TOTALS: REGRESSION ESTIMATES OF DIFFERENTIALS IN LABOUR

FORCE PARTICIPATION, EMPLOYMENT, HOURS, EARNINGS FOR QUARTERS 3
TO 10 (a)
Labour Force Hours

Participation Employment Worked Earnings
Rate (b) Rate per week per week
White
Absolute differential -6.7* -5.9* -1.4 -3.1
Per cent differential -33.2 -34.7 -30.6 -33.2
Black
Absolute differential -.8 -.3 -0.1 .8
Per cent differential -3.6 -1.5 -2.2 7.8
Spanish-speaking
Absolute differential -3.8 -5.2 -1.9 -4.1
Per cent differential -31.8 -48.3 -55.4 -54.7
(a) The data for these tables consist of 693 husband-wife families who reported for at least 8 of the 13
quarters when interviews were obtained. The reported differentials in each measure of labour supply
are the experimental treatment group mean minus the control group mean, as measured in a regression
equation in which the following variables were controlled: age of wife, education of wife, numbers of
adults, number and ages of children, site, pre-experiment family earnings (other than wife's) and pre-
experiment labour supply variables of the wife. The means and the asociated control-treatment
differentials may therefore be interpreted as applicable to control and treatment groups with identical
composition in terms of these variables. Per cent differentials are computed using the mean of the
control as base.
(b) Official government labour force concepts, used in the experiment, define someone as in the labour
force if she is employed or unemployed. Someone is unemployed if she is actively seeking
employment, waiting recall from layoff or waiting to report to a new wage or salary job.
* Significant at the .95 level (two-tailed test).

SOURCE: U.S. Department of Health, Education and Welfare, 1973, pp. 24-25.
46
TABLE 2.8: FAMILY TOTALS: REGRESSION ESTIMATES OF DIFFERENTIALS IN LABOUR FORCE PARTICIPATION
EMPLOYMENT, HOURS, AND EARNINGS FOR QUARTERS 3 TO 10(a)
Per cent Per cent

Number in Number Hours adults in adults
labour force employed worked Earnings labour force employed
per family (b) per family per week per week per family per family
White
Control group mean 1.49 1.3 46.2 124.0 57.6 51.1
Absolute differential -.15** -.18** -6.2** -10.1 -5.3** -6.1**
Treatment group mean 1.34 1.12 40.0 113.9 52.3 45.0
Per cent differential -9.8 -13.9 -13.4 -8.1 -9.1 -12.0
Black
Absolute differential -.07 -.07 -2.2 4.1 -1.6 -1.6
Treatment group mean 1.31 1.1 39.5 118.1 52.7 45.3
Per cent differential -5.4 -6.1 -5.2 3.6 -2.9 -3.3
Spanish-speaking
Absolute differential .08 -.02 -.4 5.0 2.4 -1.0
Treatment group mean 1.23 1.02 38.6 107.4 5.0 -2.2
Per cent differential 6.7 -1.5 -.9 4.9 5.0 -2.2
(a) The data for these tables consist of 693 husband-wife families who reported for at least 8 of the 13 quarters when interviews were obtained.
The reported differentials in each measure of labour supply are the experimental, treatment group mean minus the control group mean, as
measured in a regression equation in which the following variables were controlled: age of husband, education of husband, education of
wife, number of adults, number and ages of children, sites, and pre-experiment labour supply variables for the husband and wife. These
means and the asociated control-experimental differentials may therefore be interpreted as applicable to control and experimental groups
with identical composition in terms of these variables. Per cent differentials are computed using the mean of the control as base.
(b) Official government labour force concepts, used in the experiment, define someone as in the labour force if he or she is employed or
unemployed. Someone is unemployed if he or she is actively seeking employment, waiting recall from layoff or waiting to report to a new
wage or salary job.
** Significant at the .99 level (two-tailed test).

SOURCE: U.S. Department of Health, Education, and Welfare, 1973, pp-26-27.
47
For the for the family as a whole, there were reductions in labour supply which again were relatively small.
Labour supply differentials did not exceed 14 per cent. All of the differentials for white families, except for
the earnings measure, were statistically significant, while none of those for Spanish-speaking or black
families was significant.
Labour supply response -- treatment group and family type differentials: Since the treatment control
differentials outlined above only provided a simple summary of the labour supply results of the experiment,
the experimenters developed a more refined analysis that could reflect the distinctions between the eight
different treatments used in the experiment and the variations in family characteristics. The model allowed
for different responses to plans which varied in both basic benefit levels and withdrawal rates, and allowed
for variations in family characteristics such as income level and length of time in the experiment. The
response functions on which these results were based were regression equations relating the labour supply
response variables to a set of control variables and to the basic benefit levels and withdrawal rates of the
experimental plans. By inserting specific values of the control and treatment variables in these regression
equati ons it was possible to predict the labour supply response of a particular type of family on a particular
type of plan. The findings obtained using this method are summarized below, with emphasis on those results
which differ from the responses implied by the simple treatment-control mean differentials in labour supply
outlined previously.
There were statistically significant reductions in hours worked for white and Spanish-speaking husbands,
with those for whites being quite small absolutely. There was a significant treatment effect on labour force
participation only for the Spanishspeaking husbands. No significant labour supply response of any kind was
found for blacks.
In more detail, and looking first at labour force participation, there were no significant treatment effects for
whites and blacks, although there was a small but statistically significant decrease in the labour force
participation of Spanish-speaking husbands. For an average Spanish-speaking husband on a plan with a basic
benefit equal to the poverty line and a 50 per cent withdrawal rate, there was a reduction of 3.2 hours worked
per week (compared with a mean working week for this group of 34.3 hours). For white husbands there was a
statistically significant reduction of 2.4 hours worked per week, while for blacks there was no significant
treatment effect. It was found that much of the reduction in working hours among Spanish-speaking
husbands
48
was due to increases in the unemployment rate among the treatment group. For white husbands, there was a
small increase in their employment rate, and it was not possible to tell whether the reduction in hours worked
per week arose from less overtime work, reductions in multiple job holdings, or some other source.
Overall, the experiment produced no consistently significant effects for husbands by withdrawal rate or basic
benefit level - for Spanish-speaking husbands higher withdrawal rates produced substantially stronger work
disincentives, while for whites the largest disincentives were estimated for plans with the lowest rates. There
was no consistent ordering by basic benefit level for either group, and indeed the most generous plan (125
per cent of the poverty level - 50 per cent withdrawal rate) showed the smallest treatment effects. The
experiment showed no significant effect for blacks. The estimated supply response for this group, though not
significant, was preponderantly positive, despite the fact that intact black families received slightly larger
average payments than the other groups. The data indicated that the earnings of the black control group
increased more slowly than those for other control and treatment groups. No reason was advanced for this
apart from the possibility of sampling variability.
For wives, it is important to note that their labour supply, as reflected by hours worked and by labour force
participation, was well below the average for the population as a whole. For example, the pre-enrolment
labour force participation rates of 16.0 per cent and 13.4 per cent for treatment and control wives respectively
were less than one half their values for all married women in the general population. This results from the
sampling method, as only families with incomes less than one and a half times the poverty line were selected.
As a result, families with multiple earners had a low probability of selection, and working wives were under-
represented. Because pre-enrolment labour supply was small, the reductions in labour supply of wives were
large in percentage terms.
White wives were almost entirely responsible for the significant negative effects on labour force participation
in the treatment group. Estimated effects of the treatment on participation rates of black wives were close to
zero and sometimes positive, and for Spanish-speaking wives they were unstable and never significant. For
the response variable of hours worked, the results were similar, though weaker.
49
Responses to the different experimental treatments were generally consistent with expectations - estimated
negative responses for all wives were consistently larger the more generous the plan, and negative responses
were also larger the higher the withdrawal rate, though these differences-were usually small and never
significant. The estimated reductions in labour force participation were not large in absolute terms - 3
percentage points for all wives and 8 percentage points for white wives. Because the mean participation rate
for control wives was only 17 per cent, the estimated percentage reduction in labour supply was large - 20
per cent for all wives and 50 per cent for white wives. It was found that while not more than 19 per cent of
wives in the control group were in the labour force in any one quarter, 41 per cent were in the labour force in
at least one of the thirteen quarters of the experiment. That is, these wives tended to enter and leave the
labour force frequently; it was noted that the treatments created a strong incentive to concentrate time that
would be spent out of the labour force into the experimental period. The experimenters commented "How
such a result is evaluated in terms of social priorities will depend on one's views about the value of having
mothers remain in the home.... Viewed as a reallocation of wives' total work effort between the home and the
outside labour market reductions of several hours per week in the market work of wives look less substantial"
(U.S. Department of Health, Education, and Welfare, 1973, p.34).
Hours worked and earnings both showed a significant reduction for white families, ranging from 8 to 16 per
cent for hours and 8 to 12 per cent for earnings. For blacks, the earnings effects were significantly positive,
rising by 9 to 13 per-cent, while hours worked showed no consistent pattern, declining by 3 per cent in one
analysis and rising by 1 per cent in another. For Spanish-speaking families, there were significant reductions
in hours, estimates ranging from 2 per cent to 6 per cent, and significant reductions in earnings of between 2
per cent and 28 per cent. (These estimates were based on treatment plans with a 50 per cent withdrawal rate.)
The statistically predicted variability of family income was also included as a control variable in parts of the
analysis. This fluctuation in income over time, for example from $200 per month in February to $600 per
month in July for a construction labourer, was included because families with variable income were taken to
have possibly weaker attachments to the labour
50
force, and experimental payments might therefore have had a stronger effect on their work behaviour. This
variability of income had a highly significant relationship to the labour supply of whites, and the more
variable the income, the more labour supply declined. Other ethnic groups did not show such results. In
summary, the results for white families were consistent with those from the separate analysis for husbands
and wives, in that significant negative effects on labour supply were found. For blacks, the results were again
predominantly positive, and for Spanish-speaking families, the labour supply effects were negative, though
generally smaller and less significant than for whites.
In summary overall, for white and Spanish-speaking families and for the experimental group as a whole, the
effects were negative, usually statistically significant, but not very large. The absence of any negative effect
for black households was noticeable. Negative effects primarily consisted of a reduction in hours worked by
white husbands, an increase in the unemployment rate of Spanish-speaking husbands, and a large relative
reduction in the labour force participation rate of white wives. The report of the experiment noted that if the
results were applied to the national, low income, urban population then the findings for whites would become
more important and for Spanish-speaking families less important. It would be difficult to generalise results
for Puerto Ricans in New Jersey to Americans of Mexican descent in the Southwest. The results for black
families were generally less reliable. The report concludes that while the results of the experiment were not
as clear as expected, it does not appear that incomeconditioned cash transfers for intact families at the levels
of basic benefits and withdrawal rates employed in the experiment would have very large effects on labour
supply.
Non-labour supply responses analysed in the New Jersey experiment included changes in consumption
behaviour, family composition and family relationships, educational efforts of teenagers, job turnover,
duration of unemployment, job characteristics, and health and social-psychological characteristics. In
general,the data series on which these analyses were based were of poor quality. Since the non-labour supply
responses were of secondary interest, the data were collected irregularly and without as much detail as for
labour supply effects.
51
Consumption behaviour was found to be significantly affected by the experiment. Families in the
experimental group became more likely to purchase a home during the experimental period, renters increased
the amount of rent they paid, presumably for better housing, and persons living in public housing were more
likely to move out into private accommodation. These effects even extended to experimental families who
were above the break-even level and did not receive payments. It was felt that the experiment possibly gave
these families greater security to consider moving or made lending institutions more willing to provide loans.
Experimental effects on other types of consumption were less clear cut. Families receiving payments were
more likely to acquire durable goods and appliances like washing machines or refrigerators. Other forms of
consumption, such as of food and clothing, showed inconsistent patterns. On the basis of these findings,
Rossi and Lyall (1976, p.141) conclude that a NIT may substantially improve the housing and level of living
of the poor.
The effect of NIT payments on family comp osition and family relationships was a major policy concern.
Since payments were not tied to the absence of a male head, the supposed incentives to family breakdown in
AFDC should not operate under a NIT. On the other hand a family might concentrate child bearing in the
experimental period in order to increase its break-even point and consequently its payments ("the natalist
bias"). These issues were investigated through regression analysis of family fertility and family cohesion, and
through Markov chain analysis of transition from various types of family unit to another, e.g. from nuclear
family to extended family or female headed family with children. There were no significant or consistent
effects on family composition. Fertility neither increased nor decreased and family cohesion was unaffected.
Family state transition probabilities, the relevant measure in Markov chain analysis, were also unchanged.
The educational efforts of adolescents were analysed in relation to the choices young people made between
work, education and leisure. No clear cut patterns of response were found. Some sample subgroups showed
experimental effects in some quarterly interviews, and there appeared to be a slightly higher probability that
males aged between 18 and 21 would continue their education. These responses were not consistent, and the
researchers concluded that experimental treatments did not lead young people to drop out of the labour force
nor to stay at school.
52
It was also considered that NIT payments could affect job turnover, duration of employment and the choices
individuals made between jobs with different characteristics, such as varying levels of status or intrinsic
satisfaction. Some relatively strong occupational effects were found - the more generous the NIT plan, the
less the probability of job turnover. Even in occupations with poor job characteristics (low earnings, low
occupational status and job satisfaction), low job turnover was experienced by those receiving high
experimental payments. It was suggested that the NIT possibly acted as a wage subsidy, permitting
individuals to remain in low paying jobs, though why they would choose to do so was not explained. A slight
tendency was found for persons in low earning jobs with high guarantees to have a shorter period of
unemployment if changing jobs. The experimental effect on job characteristics was even weaker, although
there was a tendency for younger persons to move to better jobs the more generous the NIT payment, and for
older persons to stay in the same jobs.
The relationship between experimental payments and health was analysed from two perspectives: the impact
of health status on work response and the impact of experimental treatments on health status. The experiment
was found to have no significant effects on health status or use of health care services. Not surprisingly,
being healthy or unhealthy had a significant relationship to work effort. Effects were strongest during the first
year of the experiment. Lower guarantees were associated with greater differences in earnings between
healthy and unhealthy families, but the higher the withdrawal rate the smaller the earnings difference. Thus,
the less generous the guarantee the more that healthy and unhealthy persons diverged in labour supply and
work effort, but the less generous the withdrawal rate the more they converged. As previous analysts have
noted, it is difficult to make any sense out of these findings (Rossi and Lyall, 1976, pp. 150-152). Part of the
problem arose from the definition of ill-health used in the analysis. A person was defined as unhealthy if he
or she claimed at least 2 chronic conditions or was absent from work for health reasons at least seven days in
a year. The second part of this definition incorporates labour force effort in the form of days lost from work.
That is, the researchers estimated the relationship between health status (days lost from work) and labour
force supply (also including days lost from work). This contamination was potentially serious for wives with
initial low levels of work - it was found that "unhealthy" wives worked more than "healthy" wives.
53
A wide range of social-psychological variables was analysed in the experiment. Some of the measures related
to social integration, others to states of morale and to common psychosomatic symptoms. There were no
consistent findings that these variables had an effect on earnings and work effort. They were also unaffected
by experimental treatments. However, these variables were of potentially major significance. As previously
noted, the concept of commitment to work is one of the cornerstones of the sociology of work, and it could
be argued that individuals, values and attitudes are crucial intermediate factors between economic incentives
and labour supply responses. Much of the criticism of income guarantees arises from their supposed effects
on attitudes to work. In the design of the experiment no such hypothesis of intervening variables was
developed. It has been suggested that the main method of developing social-psychological measures was the
uncritical borrowing of instruments from previous research. Rossi and Lyall (1976, pp. 168-173) described
the internal politics of the New Jersey experiment and indicate a high degree of conflict between the
economists and sociologists, arising from the peripheral role of sociological interests. The poor social-
psychological instruments appear to have been a consequence.
In summary, it should be emphasized that the analyses of all non labour supply responses were based on poor
quality data. Data quality had a direct effect on the possibility of identifying any response. The strongest
effects were found for the best measured items - home ownership, acquisition of consumer variables, and job
turnover. The inconsistent or negligible effects were found for the social-psychological variables.
2.4 Comments
Most of the following comments on the experiment are negative. As Rossi and Lyall (1976, pp. 175-177)
note, it is easy enough to be a critic as all pieces of empirical research are more or less flawed. Indeed there
probably is no such thing as a "perfect" piece of research. for even in a controlled experiment this implies
both better anticipation of what are the important causal factors and more control over these factors than
realistically can be expected. Even so, negative observations should not detract from the considerable
accomplishment that the New Jersey experiment represents for social science research.
Design features: A number of decisions about the size composition and distribution of the sample and the
administrative Procedures for carrying out the experiment were made under severe time and budget
constraints, resulting in doubts about the generality and validity of the results:-
54
(i) The choice of the target population as families headed by man eliminated the possibility of testing
responses of the large percentage of the poor located in female-headed families. Although female-
headed families were eligible for AFDC, they could be expected to behave differently under a NIT.
The generalisability of the results to the national population therefore was limited, and it was not
possible to make estimates of the costs of a national NIT program. Subsequent NIT experiments did
cover this issue more effectively.
(ii) The decision to undertake the experiment on a series of small samples in a number of cities rather
than on a probability sample of some larger population had the effect of exposing the results to site
bias from special features of the particular labour markets. Inter-site variances of considerable size
reinforce the impression of an ungeneralisable sample representing no population directly relevant for
policy purposes.
(iii) Little attention was paid in the initial design of the sample to the factor of ethnicity. After enrolment
began in Ned Jersey it was found that the central areas of Trenton, Paterson-Passaic, and Jersey City
were disproportionately black and Puerto Rican. In order to increase the number of white families in
the sample, enrolment was extended to Scranton in Pennsylvania. This introduced a further
uncontrolled factor of site-ethnicity confounding.
(iv) The Watts-Conlisk allocation model was developed after some controversy between staff at
Mathematica and IRP. The controversy was costly in terms of time delays and became a matter of
misplaced emphasis. The model was designed to optimise sample allocation with cost considerations.
It turned out that families in the control group and those in experimental groups above the breakeven
point became more difficult and more expensive to motivate to stay in the study. The advantages of
the allocation model were slighter than expected. A related issue was the casual manner in which
policy weights were given to alternative NIT plans. The weights were not devised after consultation
with OEO, HEW, or Congress and seemed to reflect the researchers' personal notions of the relative
importance of alternative plans.
55
(v) A major analytical problem arose by accident. New Jersey was selected as a site partly because it had
no welfare programs for which families with an able bodied male head were eligible. In January 1969
New Jersey extended the AFDC program to families headed by an unemployed male. This Aid to
Families with Dependent Children - Unemployed Parent (AFDC-UP) program was the second most
generous in the United States and most of the sample was eligible for payments. At that stage only
Trenton families had been enrolled for any length of time and it was decided that the rules of
operation would be changed. Families eligible for the newly introduced AFDC-UP would have to
decide every payment period whether to accept welfare or experimental payments. Families who
chose experimental payments were to remain in the sample. The Trenton sample initially conformed
to previous rules of operation but in late 1969 local authorities began a legal investigation of
overlapping welfare and experimental payments and consequently the Trenton rules were changed.
Moreover the AFDC-UP program was later drastically changed as rates were cut by 40 per cent and
the number of families served was reduced. As well the families in Scranton, Pennsylvannia
experienced a welfare system quite different from either of the New Jersey variants. Such changes
affected the nature of the experimental treatments, subjecting them to competition from welfare. The
experiment became one that measured the effects of a NIT when added to generous AFDC-UP plans.
Families were exposed to a wide variety of net guarantees and tax rates, effectively obscuring the
effects of the supposed variations in withdrawal rates and guarantee levels. It was not possible to
determine in the final analysis whether the "treatment" was the nominal guarantee and withdrawal
rates, the difference between these and competing welfare rates, or some complex combination of
rates with notches at points where there occurred strong incentives to switch from one program to
another.
(vi) A further "history" problem arose because of the numerous changes in procedures used in Trenton in
the first year of the experiment. Questions on labour force participation in the core interviews were
changed, the treatment of welfare payments was changed to take account of the situation described
above, a disproportionate number of overpayments were found because the accounting treatment
initially had not been clarified, and the level of incentive payments was altered. All these changes
were made for compelling administrative or analytical reasons, but as a result the Trenton data were
unreliable.
56
(vii) A major problem only became apparent from the final analysis. Defining the eligible population as
intact families whose total income was less than 150 per cent of the poverty line resulted in a
truncated sample. Nearly all families where the wife worked more than a negligible amount were
excluded. The sample did not include the kinds of workers who made up the bulk of the female labour
force. In effect the sample was screened on the basis of the dependent variable labour supply. This
problem was not realized until after the experimental operations were over. (The Rural experiment
shared the same income eligibility criteria and consequent deficiencies).
(viii) Finally, the intrusions of the Mercer County prosecutor and the television publicity may have had
differential effects between experimental and control groups in New Jersey, and differential effects on
experimental groups between New Jersey and Pennsylvania.
Measurement issues: A major reservation about the New Jersey experiment was that important variables
were not measured adequately. The NIT researchers adopted interviewing instruments of the U.S. Current
Population Survey and the decennial Census as measures of initial labour force effort for the sample. The
individual and household income measures used had been extensively criticized in previous literature as
being of limited usefulness and only then when used in aggregated form. Other measurement problems
related to inconsistencies between base-line measures of earnings, income, wage rates and hours worked and
measures of these variables collected during the experiment. Little attention was paid to the problems of
measuring earnings from casual labour, wages paid in cash, or other income easily forgotten in the
respondents' reports. The measures of wage rates were derivatives from earnings and reported hours of work,
and did not reflect differentials between shifts, or as a result of overtime. In default of all this information,
hours worked became the main dependent variable used in the analysis, although it was subject to reporting
ambiguities. The loss of information from poor measurement reduced the amount of analysis and testing that
could be done of various response hypotheses. Inadequate measurement of earnings biased the labour
response of experimental families relative to control families. It also eliminated the possibility of cross-
checking the labour responses obtained using hours worked with the alternate indices of earnings and wage
rates. It therefore was not possible to see to what extent NIT payments were considered as wage supplements.
overall, the final data bank was of limited usefulness for integration into other econometric studies.
57
Measurement of the non-labour supply variables was marked by even greater carelessness. The measures of
housing costs, medical care, clothing and entertainment expenditures were so unreliable that the consumption
analysis has been described as resting on faith in the researchers' abilities to patch things up with ingenuity
and intuition (Rossi and Lyall, 1976, p.187). As previously noted the main method of developing social-
psychological measures appeared to involve an uncritical borrowing from previous research, with a
consequent lack of consistent findings.
Other: A number of other issues are of significance in assessing the New Jersey experiment. The field
operations proved to be comparatively successful and a major achievement was the demonstration of the
feasibility of a large scale field experiment over a reasonable time period. The attrition rate of around 20 per
cent over this period compares well with other studies.
Conclusion: The experiment showed that for a small proportion of the population in poverty - male-
headed families in urban, industrial areas of New Jersey and Pennsylvannia - there was no evidence of
massive reductions in work effort attributable to a guaranteed income. These modest responses were sensitive
in both size and direction by race and sex, but did not appear to be sensitive to either the level of guarantee or
the tax rate.
The experiment was so flawed in respect of the size and composition of the sample that it is not possible to
generalise from these findings to any significant proportion of the poor in the United States. The problems of
poor measurement, limited time duration and competition from welfare are such that the findings cannot be
accepted as definitive. Indeed it is not possible to say just what the findings represent in terms of individual
behaviour. For instance, the lack of a negative effect on the labour supply of black households could only be
explained by the researchers as resulting from unusual behaviour by the black control group.
The New Jersey experiment represented a significant advance in the sophistication of policy-oriented social
research. However, problems in design and measurement were so great that it cannot be accepted that the
experiment answered either the specific research or the policy questions that it was meant to. Whether such
an experiment ever could answer the policy questions is arguable, depending on one's belief that it is possible
to "answer" policy questions or not.
58
3. THE RURAL EXPERIMENT
3.1 Background
Origin and objectives: An initial planning grant for the design of the Rural experiment was provided by the
Ford Foundation to the Institute for Research on Poverty at the University of Wisconsin. The experiment was
subsequently funded by the office of Economic Opportunity and the Department of Health, Education, and
Welfare.
The preceding New Jersey experiment had dealt exclusively with urban wage earners, and the researchers
doubted whether the results or the administrative techniques employed were applicable to the rural poor, who
accounted for one third of the U.S.'s population in poverty. Differences between urban and rural areas in
alternative employment opportunities and in the proportion of the population self employed could be
expected to produce differences in work responses. Administratively, a negative income tax scheme would
need to use different methods of income assessment and timing of payments for the self-employed, for
example, farmers who may receive virtually their entire annual income at harvest time. The New Jersey
experiment had restricted eligibility to families of two or more members with male heads aged between 18
and 58 years, thus excluding families headed by females and those over the retirement age. As a consequence
of these factors, and in order to assess the costs of a nationwide negative income tax scheme, there was a
perceived need for social experiments to complement that in New Jersey.
The primary objective of the experiment was to measure the effect of alternative tax rates and minimum
guarantees upon the work incentives of rural residents and to compare these findings with those in New
Jersey. This issue still was seen to be of paramount importance because it was felt that a major barrier to
acceptance of a nationwide negative income tax program was the commonly held belief that such payments
would significantly reduce the work effort of able bodied males. Apart from estimation of the labour supply
response of the working poor, other objectives included the measurement of the effects of alternative
negative income tax plans on the rate and composition of migration, and the effects of payments on the health
and school performance of the children of the poor. Other effects of interest included changes in expenditure
patterns, adult education and job training, family structure, involvement in social, business and political
organisations, family health, and social and personal attitudes.
59
The theoretical expectations of the Rural income maintenance experiment were derived from the static theory
of labour-leisure choice described previously. The conventional income and substitution effects on labour
supply which are assumed to apply predict reduced hours of work and reduced probabilities of labour force
participation for those experiencing the experimental treatments. A number of extra qualifications need to be
made to this theory in regard to farm families. In particular, it is necessary to distinguish between farmers
who also work part time for wages and those who do not. The incidence of such part time work would affect
marginal wage rates, and consequently the comparative value of work and leisure for farmers. If farm
families do not view farm and non-farm earnings as having a one for one substitution rate, there would be
more substitution possibilities in a rural experiment than there were in the urban experiment, e.g.
experimental payments may induce farmers to shift from part time wage work to the production of non-
taxable farm goods for consumption.
Duration and cost: The experiment began operating in December 1969 and the last experimental
payment was made in 1972. The total budget was $4.6 million, of which $2 million was to be transferred as
benefit payments to families. By 1977, the experiment had gone $1.6 million over budget, for a total cost of
$6.2 million.
Eligibility criteria: Eligibility required a family income in the year prior to the experiment of less than
150 per cent of the official poverty line for that year. No work requirements were imposed - participants
neither had to register for work nor to accept offered employment in order to receive payments.
Sample selection: Because of budget constraints exercised by OEO, this experiment, like that in New
Jersey, was based on a sample drawn from a number of homogeneous groups in a limited geographic area,
rather than on a nationwide random sample. Evaluation of pertinent data from the 1960 Census of Population
on such factors as density of population, pervasiveness of poverty, race, ethnicity, and type and diversity of
agricultural production led to the choice of the South and the Midwest as sampling regions. Areas, counties
and sites were then successively selected so that areas would be agriculturally diverse and preferably contain
moderate sized cities, with populations greater than 10,000 but less than 50,000. Counties were selected to be
typical of their entire region according to social, economic and demographic characteristics. Six counties
were visited and the final sites - Duplin County in North Carolina and Pocahontas and Calhoun Counties in
Iowa -
60
were selected to be representative of the five states in the South and the three in the Midwest that contained
about one third of the U.S. rural poverty population.
The size of the sample was determined by the OEO, which allotted less money to the Rural experiment than
the New Jersey experiment, as it judged that the urban poverty problem was more important than the rural
poverty problem. The OEO also insisted that a small part of the sample be composed of households headed
by females and households with heads more than 58 years of age.
Data from the 1960 Census were then used to estimate the total number of dwelling units to be contacted in
each county to obtain the desired sample size. The first step was to locate, map and number every dwelling
unit in each county. From these, 3,0OO North Carolina and 3,800 Iowa dwelling units were randomly
selected to receive a screening interview, which provided information used to compute eligibility for
enrolment. These screening interviews also showed that there were fewer low income families than the
official data indicated, so 959 additional dwellings were contacted in North Carolina, and 4,496 in Iowa. A
second pre-enrolment interview was given to those families passing the income test in the screening
interview (i.e. having an income less than 150 per cent of the 1968-69 poverty level). This second interview
provided more detailed information on family income, assets, and rent and other important base-line
information on the families. The final sample was then drawn.
There were 809 sample households initially enrolled in the Rural experiment. Of these, 108 sample
households were headed by non-aged (58 years or under) females and 114 were households with heads aged
more than 58 years, leaving 587 sample households to represent two-parent working, non-aged headed, poor
families - the prime population target. In contrast with this, there were about 1,350 sample households in the
New Jersey experiment, 1,800 in Gary, and 4,900 in Seattle-Denver forming a total sample of about 8,000 to
represent the 31.4 per cent of the U.S. poverty population residing in cities of over 50,000. The 809 sample
households in the Rural experiment represented the 35.5 per cent of the U.S. poverty population residing in
rural areas.
The same statistical design used in the New Jersey experiment, the Conlisk-Watts allocation model, was
separately applied to each of the three groups of family heads. Within each group the sample was to be
allocated across a design space of 36 cells - consisting of five treatment and one control group, each stratified
by three pre-experimental income categories (0-50
61
per cent, 50-100 per cent, 100-150 per cent of the poverty level), and the two locations. Policy weights,
similar to those in New Jersey, were developed for each of the treatments used in the experiment, to
minimise differences in labour force response between a single program in a particular site and the
corresponding control group. These policy weights were combined with estimated population densities to
form final weights that varied by region and welfare level - leading to the allocation of 62 per cent of the
sample to North Carolina and 38 per cent to Iowa.
Characteristic of the sample: A series of tests was performed on important demographic variables for the
sample of male heads less than 63 years of age to check for differences between the control and experimental
groups. Sample selection appeared to have the desired randomness in regard to race, age, marital status,
home ownership, family size, and number of other adults in the household apart from the head and spouse.
There was a bias towards farmers in the experimental group, which also had a slightly lower average wage
income than the control group. The largest experimental/control differences related to the presence of young
children - there were significantly fewer children under six in the experimental families - and related to the
spouse's initial (1969) earned income - a greater proportion of spouses in the control families earned at least
$200 per year.
While the differences between control and experimental groups were generally small, there were very
significant differences between the Iowa and North Carolina samples, reflecting the contrasts in
characteristics of poor families in the South and the Midwest. Education and literacy levels in North Carolina
were low - the average educational attainment of household heads was eight years in North Carolina and
eleven years in Iowa. Enrollers estimated that one half of the North Carolina family heads either had
difficulty in reading or could not read at all, and that one quarter could write only their names. Black families
comprised more than half of the North Carolina sample, while there were no blacks in the Iowa sample;
many more of the Iowa sample were under 40 years of age; more than 60 per cent of the Iowa male heads
had graduated from high school, while less than 10 per cent of the North Carolina group had done so; many
more Iowa family heads were self-employed, primarily as farmers; and while more North Carolina farmers
owned their own farms, the Iowa farmers had more net equity in farm assets. As well, there were important
regional differences in income earned by spouses, with North Carolina spouses much more likely to have
earned more than $200 in wages in the year before the experiment started (1969). In summary, the North
Carolina sample was composed of a poorly educated, older mix of small farmers and unskilled wage earners,
while the Iowa sample appeared more
62
middle class, to be composed of reasonably well educated farmers who happened to have a bad year in 1969,
and younger labourers waiting to get a farm of their own.
Experimental treatments: The experimental treatments consisted of five combinations of withdrawal rates
and guarantee levels. The prime population target of the experiment was the 587 households headed by non-
aged males, 54 per cent of which were assigned to the control group and 46 per cent to the experimental
groups (This division was the same for both North Carolina and Iowa.) The percentage distribution of the
269 experimental families among the five experimental treatments chosen is shown in Table 3.1 below.
TABLE 3.1: PERCENTAGE DISTRIBUTION OF NON-AGED MALE HEADED EXPERIMENTAL

FAMILIES BY TREATMENT COMBINATION *
Guarantee Withdrawal Rate (Per Cent)

50 - 14 -
75 25 28 11
100 - 22 -
* Figures are rounded.
SOURCE: Bawden and Harrar, 1978, p.29.
The subsample of older family heads of either sex comprised 114 such families or single individuals. Fifty
three per cent of this subsample were allotted to the control group and 47 per cent distributed among the five
experimental plans, in approximately the same proportions as for the non-aged, male headed subsample
above. The household sample headed by non-aged females consisted of 108 sample families, of which 53 per
cent again were assigned to the control group and 47 per cent to the experimental group.
The Aid to Families with Dependent Children - Unemployed Parent (AFDC-UP) Program in Iowa had higher
payments than all but the most generous treatment plan - 50 per cent withdrawal rate, 100 per cent of poverty
level guarantee (50T/100G). Therefore no female-headed families were assigned to the four less generous
plans, but instead, three new plans were established for Iowa only - 3OT/100G, 5OT/125G and 7OT/125G.
The total experimental sample of 51 female-headed families was distributed among the eight resulting plans,
as shown in Table 3.2 below.
63
TABLE 3.2: PERCENTAGE DISTRIBUTION OF FEMALE-HEADED FAMILIES BY TREATMENT

COMBINAT1ON *

50 - 12 -
75 10 18 8
100 10 20 -
125 - 14 10
* These figures add to more than 100 per cent due to rounding.
SOURCE: Bawden and Harrar, 1978, p.30.
Sample attrition rate: A total of 809 families was initially enrolled, and of that number 729 remained
enrolled for the three years of the experiment. This drop-out rate of approximately 10 per cent compares with
that of 20 per cent in the New Jersey experiment.
3.3 FINDINGS
Data analysis: Most of the analysis was undertaken on a subsample of the 809 families originally enrolled.
Separate analyses were performed for families of wage earners and for farm operators. The wage earner
sample comprised husband-wife families of constant marital status where the husband was less than 63 years
of age and not disabled, and the primary source of income was not from self employment. This subsample of
264 families was made up of 146 control and 118 treatment group families. The allocation of the 118
treatment families is indicated in Table 3.3 below.
TABLE 3.3: ALLOCATION OF WAGE EARNER FAMILIES BY TREATMENT COMBINATION

50 - 5 -
75 36 40 7
100 - 30 -
SOURCE: Orr, 1978, p.7.

64
Approximately one half of the wage earner sample was composed of North Carolina blacks, about one fourth
were North Carolina whites and one fourth were Iowa whites.
The farm operator sample originally comprised 262 families, but after exclusions due to such factors as
negligible or discontinuous farming activities, extreme age and changed marital status about 220 families
remained in the sample. There were 117 farm operators in the experimental groups and the balance was in the
control group. The allocation of the 117 treatment families is shown in Table 3.4 below.
TABLE 3.4: ALLOCATION OF FARM OPERATOR FAMILIES BY TREATMENT

COMBINATION *

50 - 24 -
75 17 28 14
100 - 24 -
* These figures add to 107. The discrepancy is not explained in the source.
The farm operators were about evenly divided between the two sites.
Wage Earners: The experimental responses of wage earners varied substanti ally among family members,
and, to a lesser extent, according to alternative measures of response and among sample subgroups. Table 3.5
summarises the work response effects for wage earner families.
In general, the responses of husbands were smaller than those of wives and dependants. As with the New
Jersey experiment, relatively large reductions in income and work of wives and dependants were measured
against a small base. The wage income of wives accounted for only 5 to 21 per cent of total family wage
income in the three subgroups, while the wage income of dependants was less than 10 per cent of total family
wages. Husbands showed reductions in wages or hours in only two of the three subgroups, and in none of the
three groups did any noticeable withdrawal from employment occur. A more consistent
65
TABLE 3.5: EFFECT OF RURAL INCOME MAINTENANCE EXPERIMENT ON INCOME AND

WORK RESPONSES OF NON-AGED HUSBAND-WIFE WAGE EARNER FAMILIES,
BY SITE (a)
Per cent of Control Mean
Wage earner North Carolina Iowa (b) Eight State

and variable Black (b) White (b) aggregate(c)
Husband
Wage Income -7** 0** -10** -4
Wage Hours -8 +3*** -1 -1
Employment Rate -1 -1 0 -1
Wife
Wage Income -41*** -3 -32 -25
Wage Hours -31*** -23 -22 -27
Employment Rate -25* -28** -38** -28
Dependant
Wage Income -19 -57** -8 -39
Wage Hours -16 -66** -27 -46
Family as a whole
Total Pre-Transfer
Income -14*** -9*** -18*** -13
Wage Income -14*** -8** -17*** -12
Wage Hours -10** -18** -5 -13
Number of Earners -6*** -16*** -8** -11
(a) The significance levels are based on joint F-tests on the coefficients of treatment dummy, tax and
guarantee variables -and not tests of the significance of the treatment/control differentials.
* Significant at the 0.10 level.

** Significant at the 0.05 level.
*** Significant at the 0.01 level.
(b) Responses are standardised to a 45 per cent withdrawal rate and 80 per cent guarantee plan.
(c) Weighted averages of the basic data from which the subsample percentages were derived using the
following weights: Nth. Carolina blacks, 0.31788; Nth. Carolina whites, 0.48943; Iowa, 0.19269.
No tests of significance can be computed for these differentials. The eight states from which the
experimental sites were selected were Alabama, Georgia, Illinois, Iowa, Mississippi, North Carolina,
South Carolina, and Wisconsin.

66
pattern emerges when the income and work responses of all family members are combined. In two of the
three groups, wages and total family income (excluding experimental payments) fell by between 14 and 18
per cent, while hours and employment were reduced by 5 to 10 per cent. Among the third group, North
Carolina whites, the pattern is reversed, there being a relatively greater reduction in hours and employment of
between 16 and 18 per cent and a relatively smaller reduction in wages and total income of 8 to 9 per cent.
The combined weighted responses for the three groups show a much more uniform response across the
various measures. As shown in the last column of Table 3.5, for the eight state aggregate, the weighted
income and work reductions for husbands ranged from 1 to 4 per cent; for wives, from 25 to 28 per cent, and,
for dependants, from 39 to 46 per cent. For the family as a whole, all weighted response measures fell by
between 11 and 13 per cent. These weighted responses give the best summary of the overall pattern of
response. On the basis of these estimates, the experimenters concluded that for rural wage earners a negative
income tax of the type and level considered would have little or no impact on the employment rate and
earnings of husbands, but that it would cause about a 25 per cent reduction in the employment rate of wives
and a decline of nearly 50 per cent in the employment rate of dependants, with accompanying falls in their
hours of work and earnings. Overall family income - which would determine the level of benefit payments
and the net cost of a negative income tax program - would fall by about 13 per cent.
Analysis of the variation of response in relation to the levels of the guarantee and the tax rate yielded mixed
results. In general, the level of the guarantee had no effect on the size of the response, but about half of the
response measures for the three subgroups were sensitive to the tax rate in the expected direction. Various
analyses of interaction variables were performed to tests whether experimental response varied with family
or individual characteristics. Most of these differences in response proved to be statistically significant.
Among black husbands in North Carolina, the response did decline significantly with age, and there was
some evidence of a greater response among North Carolina husbands working as hired farm workers, wives
with school age children or whose families engaged in some farm work, and dependants 18 to 20 years of
age. As well, the responses of wives varied seasonally, with the largest response in the winter months when
employment rates were lower in both treatment and control groups.
67
Farmers: Table 3.6 provides details of the work response effects for farm operators and their wives.
TABLE 3.6: EFFECT OF RURAL INCOME MAINTENANCE EXPERIMENT ON FARM

OPERATORS' AND WIVES' LABOUR SUPPLY, BY SITE
Per cent of Control Mean

Worker and
labour supply measure North Carolina Iowa
Farm Operators
Hours of farm work 10.7* 10.9
Hours of wage work -31.3 (a) -10.0 (a)
Employment in wage work -6.0 25.6
Total hours of work -2.7 9.5
Wives
Hours of wage work -62.7 (a) -53.5 (a)
Employment in wage work -8.2 7.0
Farm Operators and Wives
Total hours of work -16.4 (a) 7.3 (a)
* Significant at the 0.10 level.
(a) This differential is derived from other estimates, therefore no significance levels can be computed.
Several measures of labour supply were analysed for farm families. Since 78 per cent of farm families in
North Carolina and 50 per cent of those in Iowa had one or more members who worked for wages, effects
on both farm work and wage work were estimated. In both Iowa and North Carolina, farm operators and
their wives considerably reduced their hours of wage work. Hours of farm work by farm operators increased
by about 11 per cent in both sites, though only the increase in North Carolina was statistically significant.
The net result - in total hours of work, for farm operators alone and for operators and wives was a decline in
North Carolina, and an increase in Iowa.
68
These results, particularly those for wage work, should be viewed with caution, because of the small number
of operators and wives who worked for wages and the generally low statistical significance of the estimates.
The experimental effect on farm hours did not differ significantly with variations in the levels of the
withdrawal rate or the guarantee. There was a marked trend, especially in North Carolina, for the size of the
response to grow over the course of the experiment. It was also found that the increase in farm hours worked
was large for younger operators with small families and a smaller proportion of rented land.
The positive experimental effect on hours of farm work was unexpected, and the experimenters attempted to
account for it in a number of ways. It was noted that farm operators are able to change the mix of land and
capital they employ, as well as their own supply of labour, i.e. they can easily shift from wage work to farm
work. However, the observed increase in farm hours worked was not significantly greater for farmers who
also worked for wages than for those who did not. It was also thought that the increase in farm hours might
result from systematic over-reporting of hours by farmers in the experimental group. Hours devoted to farm
work are not as easily defined and consequently not as easily measured as wage hours, and therefore may be
subject to reporting errors. The only obvious reason for experimental families consistently to report more
farm hours than control families is that the reduction in their wage work resulted in more non-market time
that could be reported as farming activities. Therefore it is very difficult to distinguish the effect of reporting
bias from a real shift from wage work to farm work. In any case, such over-reporting would not account for
the increase in farm hours of those who did not work for wages.
The income of farm families were also analysed in relation to farm profit, defined as gross revenue less
current operating expenses. Average farm profits in the control group were substantially higher in Iowa
($11,895 a year) than in North Carolina ($4,758 a year). In both sites, the experimental treatments appeared
to reduce farm profits - by 25 per cent in North Carolina and by 8 per cent in Iowa - although these
reductions had low statistical significance. Changes in the guarantee level or the withdrawal rate had no
significant experimental effect, and there was no distinct time trend. The simultaneous findings of decreased
profits and increased hours of farm work imply that the efficiency of farm operations declined among
treatment families. Direct analysis confirmed this. Both price efficiency - the use of the optimal combinations
of inputs - and technical efficiency - the amount of output produced from a given combination of inputs -
were analysed. Farmers in the treatment group were found to be less technically efficient than those in the
control group, while
69
price efficiency was unaffected. The differences in technical efficiency were greatest in North Carolina and
increased over the course of the experiment. The decrease in technical efficiency was also significantly
greater at higher withdrawal rates. The experimenters offered no explanation for the decline in the efficiency
of treatment group farmers.
In summary, many of the results of the Rural experiment closely resemble those of the New Jersey
experiment. In families of wage earners there was a larger decline in income relative to that of the control
families than there had been in New Jersey, but the decline was still modest. Husbands' hours did not show a
consistent decline, and those declines that were found tended on average to be even smaller than those in
New Jersey. As in New Jersey, husbands did not withdraw from the labour force, but the percentage of
working wives fell considerably. One new outcome in the rural experiment was that wage work by
dependants also fell. Since wives and dependants had worked only a small number of hours before the start
of the experiment, the effect on total family work for wages was small. Among farm families there was a
marked reduction in hours of work for wages, with a reduction for husbands of 10 per cent in Iowa and 31
per cent in North Carolina, and with wives working 50 to 60 per cent less than those in the control group.
Hours of farm work reported by farm operators rose by 11 per cent in both sites, so that total hours of work
by farm operators and their wives actually rose in Iowa. The experimenters strongly indicated the need for
special care in defining administrative and reporting procedures for self-employed farmers in order to avoid
problems of under-reporting and misreporting of incomes and assets. They concluded that accurate
measurement of farm income and assets may be of greater importance in considering the costs of a NIT
among a rural population than any likely labour supply response.
Non-labour supply responses investigated in the rural experiment included consumption patterns, marital
dissolution, nutrition, geographic mobility, school performance, delinquency, political participation,
psychological well-being, and the aspirations, school attitudes, and school behaviour of teenage youth. A
major focus of these analyses was the extent to which the findings supported or conflicted with the "culture
of poverty" thesis. The "culture of poverty" theory developed by Lewis (Lewis, 1961; Lewis, 1968; and in
Moynihan, 1969, pp. 187-200) sees poverty as a way of life transmitted from generation to generation, so that
poor individuals cannot adapt to new life styles even when their economic or material opportunities are
greatly enhanced. It is argued that an important part of people's collective adaption to poverty is the
development of a culture that values
70
the possible and minimises concern with what cannot be changed. This "culture of poverty" is seen to have
its own structure and rationale, and is positive in the sense that it assists the poor to cope with their real
deprivation. As individuals, the poor are supposed to experience "despair, apathy and hopelessness", an
"inability to defer gratification" and a "sense of resignation and fatalism" (Lewis, 1968, pp. 51-54), and these
conditions are further associated with unemployment, low levels of literacy and education, and related
problems. The persistence of these values implies the persistence of poverty in the face of income
maintenance programs. Clearly this theory has implications for the type of anti-poverty program adopted, and
for the very possibility of success for an anti-poverty strategy.
Consumption behaviour was analysed in relation to nutrition, clothing, durables, and assets and debts.
Experimental payments had no ascertainable effect on nutrition in Iowa, but a persistent, small, positive
effect in North Carolina. The effects in North Carolina appeared to become stronger as the experiment
progressed, although the North Carolina sample started the experiment with very low levels of nutritional
adequacy, e.g. 60 per cent had inadequate calcium intake, 50 per cent had inadequate iron intake and more
than a third had inadequate vitamin C intake. According to the Food and Nutrition Board of the National
Research Council, these diets were "dangerous to health". The strengthening, positive effects of the
experiment on nutrition led Hannan (1978, p.194) to conclude that the findings conflict with "culture of
poverty" theory and with arguments in favour of in-kind benefit programs.
There was evidence that families treated experimental payments differently from the bulk of their income, as
there was a much greater tendency to buy clothing with these payments. In general, the experimental
payments were found to be associated with slightly increased household inventories of durable goods and
cars (except for cars in farm households), reduced short term farm debt, and increased farm liquid assets.
These responses were analysed in terms of households' marginal propensity to consume, comparing white
and black families, and distinguishing extra income as household head's earnings, spouse's earnings or
experimental payments. Most of these findings were not statistically significant and were inconsistent.
The rate of marital dissolution for experimental families was one third higher than that for control families,
but this effect was not statistically significant. As the NIT programs became more generous the rate of
dissolution dropped so that for the most generous treatment the dissolution rate was actually below that for
the control group (although again this difference was not significant). Researchers theorised that there were
two opposing effects on marital stability - an income effect that would raise levels of satisfaction with living
standards, reduce marital strain and lower rates of dissolution, and an
71
independence effect that would lessen financial dependence of partners and thereby lessen constraints on
marital dissolution. Hannan, Tuma and Groeneveld (1977, pp.1186-1211) suggest that these two effects
operate in such a way that the independence effect predominates at lower support levels but is gradually
negated by the income effect as support levels rise.
Income maintenance could affect geographic mobility either by defraying costs of moving, leading to
increased movement, or by smoothing out income fluctuations, leading to decreased movement.
Alternatively, income maintenance may not affect mobility at all, or its full effect might not be observable in
a three year experiment. It was found that there was a positive experimental impact on propensity to move
that was stronger in North Carolina than Iowa, and was statistically significant. However, analysis was
restricted to heads of households whose marital status did not change. Since the breakdown of a marriage
could be assumed to be followed by some movement, this analysis would underestimate the extent of
geographic mobility. Nor did the analysis distinguish moves out of town or a particular labour market from
moves to a different house.
School performance was analysed in relation to absenteeism, academic grade point average, achievement on
standardised tests and comportment (school behaviour such as cooperation, courtesy, initiative and self
control). Within the North Carolina experimental sample, absenteeism was significantly lower than that in
the control group. Comportment scores, grade point averages and standardised achievement scores were all
significantly higher for experimental children. In Iowa, the effects were negative but never significant. There
were substantial differences between the relevant samples in the two states. As previously indicated, the Iowa
sample had a higher socioeconomic status than the North Carolina sample. If the "culture of poverty" thesis is
correct, the Iowa sample should have been more able to take advantage of the opportunities afforded by
income security. The opposite was found.
Delinquency was assessed through self-reporting; teenagers being asked how many times in the previous two
years they had engaged in various forms of theft, receiving stolen property, vandalism, trespassing, assault,
extortion and use of illegal drugs. The researchers have not commented upon the accuracy of the responses
they received. There was a non-monotonic pattern of effects - the guarantee analysed separately seemed to
have an opposite effect to the total experimental affect. The experimental groups were "more delinquent"
than the control groups, but increases in the guarantee produced systematic decreases in the frequency and
seriousness of delinquent acts. Perhaps more importantly the NIT plans that were associated with increased
rates of marital dissolution also increased the rate of delinquency, suggesting an indirect relationship.
However, these responses were not statistically significant.
72
Data on the political participation of experimental groups were obtained from 1970 state elections
Presidential election. The experimental impact was positive, but significant only for wives in intact families.
In 1970, 37 per cent of wives in the experimental group voted compared with 26 per cent of those in the
control group; the comparable figures for 1972 were 43 per cent and 37 per cent. It was noted that increases
of 5-10 per cent in voting percentages localised in poor populations could alter many election outcomes. The
psychological impact of the experiment was considered in relation to measures of life satisfaction, self-
esteem, anomie, sense of powerlessness, psychosomatic and nervous symptoms and worry. A single scale of
psychological well-being was constructed by adding positive indicators like self-esteem and subtracting
negative factors like self-deprecation. The experiment seemed to have a mild positive effect on well-being.
While those on the least generous treatments had lower well-being scores than the control group, those on the
most generous plans had significantly higher scores. In particular, the highest guarantee had a positive and
significant impact on psychological well-being. The aspirations, school attitudes and school behaviour of
teenage youth were also investigated. Those on the least generous programs had significantly lower
educational aspirations and expectations than the control group. There was no other apparent experimental
effect.
In summary, the results of the Iowa-North Carolina experiment do not support the view that many low
income individuals are trapped in a "culture of poverty" that prevents them from adapting to changes in their
economic environment. The changes produced in the environment of those participating in the experiment
were relatively slight, but social, psychological and political effects were observed.
3.4 Comments
Design: The Rural experiment was marred by a number of design features that in retrospect seem to have
been avoidable:-
(i) The generalisability of the findings was limited by the sampling strategy adopted. The two sites were
not even a strict probability sample of the Southern and Midwestern areas they were chosen to
represent. The South and the Midwest contained about one third of the U.S. rural poor. Other rural
areas, in the Far West, the Great Plains and the Eastern states, were very different in regard to farming
structure. The sample contained no Mexican Americans or American Indians, a significant proportion
of the rural poor.
73
(ii) The sample itself was fairly small - only 809 families were enrolled. Thirteen per cent of the sample
was allocated to the female-headed group and a further fourteen per cent to families with an aged
head. These subsamples yielded little useful information but were included in an attempt at
comprehensiveness and to remedy the deficiencies of the New Jersey experiment in this regard. This
left an even smaller sample for allocation to the treatments more relevant for policy purposes. A total
of 269 experimental families were distributed among the five experimental treatments. In some cases
these cells were very small. For example, the largest single experimental cell - the 75G/50T treatment
- contained about 75 families, 47 of whom were in North Carolina and 28 in Iowa. The smallest Iowa
cell - the 75G/70T treatment contained less than a dozen families. There were only eight wage earner
families in the 75G/70T treatment cell and only 60 farm operator families in the same cell. Overall,
the heterogeneity of the sample population resulted in many, very small subgroups for analysis.
(iii) The Conlisk-Watts allocation model interacted with the limited sample size. The model provided
experimental designs that met the budget constraints, but did not provide statistically reliable results.
For example, the response coefficient for nonfarm labour of wives suggests a 20 to 30 per cent
reduction in labour supply, but this coefficient was not significant even at the 90 per cent level.
(iv) As in New Jersey, the condition for eligibility, that family income had to be less than 150 per cent of
the poverty line in the year prior to the experiment, had the effect of truncating the sample and
excluding families with working wives. While an actual negative income tax that based payments on
family income would pay benefits to approximately the same truncated population, this truncation
meant that only limited generalisations could be made about labour supply response.
(v) Analysis was complicated by some confounding of the wage earner and farm operator samples with
the North Carolina and Iowa sites.
(vi) There was a scarcity of poor families meeting the other eligibility criteria in Iowa. This resulted in the
inclusion of only a few families in the lowest income stratum, so that the labour supply response of
families with very limited earning capacity could not be studied. On the other hand, since there were
few families in the experimental cell with a 70 per cent withdrawal rate, there was little evidence in
how families facing withdrawal rates over 50 per cent would behave.
74
(vii) The problem of making inferences from a temporary NIT experiment to a permanent national
program again arises. A temporary experiment may lead to an underestimate of the labour supply
response of male heads of families who might not reduce their hours of work in order to obtain cash
payments only for a three year period. Alternatively, the response of wives and dependants may be
over-emphasised by a short experiment - they may reduce their "secondary" earnings with the
expectation of going back to work once the experiment is over. The pattern of these responses could
not be established in a three year experiment, nor could the incidence of early retirement or reduced
inhibition in quitting or changing jobs.
Measurement issues: The Rural experiment revealed that special care needs to be taken in defining
administrative and reporting procedures for the self-employed. Farm operators, like all self-employed, are
well known for under-reporting income to the U.S. Internal Revenue Service. The farm operators in the
sample were found to report 40 per cent more income to the IRS than to the experiment's payment office.
Since income was under-reported and incorrect payments were made, the assumed guarantee levels and
withdrawal rates did not actually apply, so it is not possible to accurately estimate the response to these
treatment factors.
Moreover, the definition of labour supply is markedly more difficult for farmers than it is for wage earners.
There are substitution possibilities open to farmers in the form of working on their farm to grow non-taxable
goods for self consumption. The accounting period also influences effective tax rates by changing the
marginal impact of a change in income. For instance, a seasonal worker whose six months' earnings are over
the annual breakeven point would have been on the experiment half the time under a monthly accounting
system and never under an annual system. The carry-over system of accounting would have had the effect of
keeping some individuals off the experiment for longer periods than they would otherwise. A further
complication arose from the effective double taxation of farmers' assets; income that arose from assets was
taxed and there was a further imputed income component of 10 per cent of assets in excess of $20,000. These
problems arising from under-reporting of income, double taxation of assets and the use of a moving average
system of accounting complicate analysis of experimental results. They were all likely to occur in any "real
world" national NIT program and in that sense provide valuable administrative lessons, but they made it
impossible to assert convincingly that the research questions of the Rural experiment were answered.
75
Other: While complete predictability of experimental results is not necessarily a virtue, an experiment
with unexplainable findings would seem problematic. The researchers were unable to account for the
observed increase in farm hours worked by the farm operators except as a consequence of over-reporting.
Some of these operators had never worked for wages and they apparently increased their farm work as a
result of receiving NIT payments. Over-reporting could not account for this increase. Neither could the
researchers explain why the technical efficiency of treatment farmers should decline relative to that of control
farmers. A further anomaly was that over the course of the experiment the average total income of
experimental families did not rise as fast as the average total income of control families, even though
experimental payments were adjusted according to movements in the CPI. This suggests that a negative
income tax will result in relative reductions in total family income, hardly the original goal of a NIT.
Conclusion: The findings of the Rural experiment closely resembled those of the New Jersey
experiment. In families of wage earners there was a modest decline in husbands' hours of work and a
considerable withdrawal of wives from the work force. The wage work of dependants also fell. In farm
families, there was a marked reduction in hours of work for wages both for husbands and wives, although
hours of farm work increased. Sampling problems suggest that the results of the Rural experiment are not
capable of being generalised to the national rural poor. Problems of measurement arising out of the
administration of the experiment meant that the Rural experiment, like the New Jersey experiment before it,
did not resolve the research questions it was designed to investigate. The experiment provided experience in
the practical realities of administering a NIT, but it represented no significant advance in experimental
methodology.
76
4. THE GARY EXPERIMENT
4.1 Background
Origin and objectives: The Gary experiment was designed to parallel the earlier OEO experiments in New
Jersey, Iowa and North Carolina. The experiment was sponsored by the Department of Health, Education,
and Welfare, and was funded through a HEW contract with the Indiana State Department of Public Welfare.
The design and operation of the project was carried out by the University of Indiana under a sub-contract
with the State Welfare Department.
The Gary experiment was distinctive in that it dealt with black, female-headed families in a ghetto - a
population not adequately treated in previous experiments. A further unique feature of the Gary design was
the investigation of demand for social services, such as day care, family counselling, information services
and homemaker services. The experiment's intention was to analyse the trade-off between the demand for
cash transfers and the demand for services, and also the interactive effect of services and transfers on work
incentives. The Gary experiment was distinguished by a number of other features. The sample in Gary, an
Indiana steel town, was divided between those living in a Model City area and those living outside this area.
The Model City became something like a saturation sample, where all the community could be eligible for
NIT payments, although saturation sampling was not an explicit design objective. The Model City residents
had access to a greater number of social services than those outside the area, and also were exclusively
offered day care subsidies.
Other research objectives were pursued in the Gary experiment. Whilst still estimating income and
substitution effects, the labour supply theory was recast to analyse family work decisions. First, the basic
model was amended to include indebtedness, as it was hypothesised that income maintenance payments
would increase access to credit and the resulting debts would induce extra work efforts. Second, the
dichotomous market/non-market labour supply theory was expanded to include analysis of market, non-
market, and leisure goods. In previous experiments all time not spent in market work was analysed as leisure.
Non-market labour such as housekeeping and child care, particuarly salient for female-headed families, was
now considered as a further option. For example, purchase of dishwashers or vacuum cleaners or child care
services or home help services, made possible by NIT payments, could allow experimental families to
increase their leisure at no cost to their work hours. This introduces further complicating factors into the
analysis. Finally, the experiment studied the effects of NIT payments on demand for housing and on the
choices teenagers made among school, work and leisure.
77
Duration and cost: Design of the project began in late 1969 and families were enrolled between March
and July 1971. Payments continued to be made until 1974. The total cost of the experiment is estimated to
have been $21 million.
Eligibility criteria: Eligibility was confined to black families with the head between 18 and 58 years of
age and containing at least one child under the age of 18. There were no income requirements, but of course
families could only receive payments if their income was below the break-even level.
Sample selection: The City of Gary was specifically selected because it contained a substantial
population of black, female-headed families living in a ghetto. (The reports on the experiment usually
describe this either as "a ghetto environment" or "a ghetto setting".) The Gary site was distinctive in that it
was a steel town with high unemployment then current and with few job opportunities available to the main
treatment group.
Characteristics of the sample: A stratified random sampling procedure was used to ensure that of the
1,799 participating families, 1,061 or approximately 60 per cent were female-headed. The sample was split
65 per cent - 35 per cent between the Model City and non-Model City sites. The 40 per cent of families with
a male head of household present were found in pre-experimental interviews to have low incomes but
generally were not extremely poor. The husbands typically were full time workers who earned more than the
poverty level of income. Only 10 per cent of these families had incomes below the poverty line. Their wives
usually did not work outside the home - only 13 per cent were employed when the experiment began. In the
few families where both parents worked, the combined income was usually too high for the family to qualify
for NIT payments. In general, this portion of the sample was regarded as unrepresentative of the population
who might be eligible for complete support under a national NIT program. Many of the families were only
eligible to receive small income supplements, and therefore were not the prime population target of a national
anti-poverty program.
78
TABLE 4.1: SELECTED CHARACTERISTICS OF SAMPLE FAMILIES (EXPERIMENTALS AND

CONTROLS) PRIOR TO THE EXPERIMENT
Husband-Wife Female-headed Families

Families AFDC Non-AFDC
Average Family size a/ 6.0 4.7 3.7
Average number of adults 3.0 1.7 1.8

Average number of children 3.0 3.0 1.8
Average monthly family income $619 $291 $289
Average monthly earnings $605 $ 41 $172

Average nonwage income, including public $ 14 $250 $117
assistance
Per cent with incomes:
Less than half the poverty line 4 47 14

Less than the poverty line but greater than half 6 27 24
More than the poverty line but less than 1.5 29 14 34
Between 1.5 and 2.4 times the poverty line 45 11 24
Above 2.4 times the poverty line 16 1 4
a/ Family size and composition data are as at the end of the first year of the experiment.
SOURCE: Kehrer, 1977, p.51.

79
TABLE 4.2: SELECTED CHARACTERISTICS OF SAMPLE HUSBANDS, WIVES, AND FEMALE HEADS OF FAMILIES PRIOR TO
THE EXPERIMENT
Female Heads
Husbands Wives AFDC Non-AFDC
Average age 40 37 34.5 37.5
Average Years of education completed a/ 9.7 10.7 10.2 10.7
Per cent with 12 or more years of education a/ 33 11 34 53
Average earnings b/ $533 $ 42 $ 35 $143
Per cent employed 93 13 13 40
Per cent in labour force 97 19 n.a. n.a.
For those employed:
Average Hours worked per week 40.3 35.5 35.1 37.4
Hourly wage rate $3.53 $2.68 $2.01 $2.45
Average monthly earnings $616 $412 $305 $397
a/ Education data are as at the end of the first year of the experiment
b/ Including those who were not working
n.a. = not available.
SOURCE: Kehrer, 1977, p-52

80
The families with female heads were generally much poorer. Over 80 per cent ware receiving AFDC benefits
immediately prior to the experiment. (In Indiana AFDC benefits were not available to male-headed families.)
About 75 per cent of the female-headed families that switched from AFDC to the experiment had incomes
below the poverty line. The female heads on AFDC were heavily dependent on welfare - 86 per cent of their
monthly income came from public transfers, and over 50 per cent from AFDC alone. Only 13 per cent of the
AFDC female heads were employed. Female-headed families not receiving AFDC payments prior to the
experiment were better off - 38 per cent had incomes below the poverty level, 40 per cent were employed,
and, approximately 60 per cent of the total income of this group came from earnings, while most of the rest
of the group's income came from Food Stamps and other transfer programs.
In summary, the Gary sample families can be described as comprising three groups - those headed by
females on AFDC, those headed by females not on AFDC, and those headed by males, with incomes and
work participation rising respectively by group, and reliance on welfare declining. Tables 4.1 and 4.2 provide
further details of characteristics of the sample prior to the experiment.
Experimental treatments: Only four income support plans were tested. The guarantee levels were not
specified as percentages of the poverty line but were approximately equal to 75 per cent and 100 per cent of
the relevant poverty level for each family. For example, in 1972 when the official poverty lines for a four
person non-farm family was $4,275, the two support levels were $4,300 and $3,300. The benefit levels were
adjusted every six months according to movements in the cost of living. Only two benefit reduction rates of
40 per cent and 60 per cent were tested. Day care subsidies were available to families in the Model City
sample. The subsidies were available to treatment and control families and were paid at varying rates - 35,
60, 80 or 100 per cent of costs. The subsidies were only paid to persons working or engaged in work-related
activities. Table 4.3 illustrates some of the features of the allocation of the sample by experimental treatment.
Sample attrition rate: The Gary experiment had an extremely high attrition rate. Of the 1,799 families who
enrolled in the experiment only 967 or 54 per cent remained when payments ended in 1974.
TABLE 4.3: SAMPLE DESIGN OF THE GARY INCOME MAINTENANCE EXPERIMENT: NUMBER OF FAMILIES BY NIT
TREATMENT
Experimental Families
Support Level: Povert Level. 75 Poverty Level All Experimental Control All
Implicit Tax Rate: 40% 60% 40% 60% Families Families Families
Families with husband present
Income:
Less than half the line 9 6 6 5 26 15 41
Less than the poverty line but greater 10 12 12 11 45 18 63
than half
More than the poverty line but less 16 14 18 44 92 113 205
than 1.5
Above 1.5 times the poverty line 46 44 100 50 240 180 420
Total 81 76 136 110 403 326 729
Families with husband absent
Income:
Less than half the poverty line 56 50 84 35 225 191 416
Less than the poverty line but greater 24 22 49 24 119 156 275
than half
More than the poverty line but less 13 22 16 116 167 35 202
than 1.5
Above 1.5 times the poverty line 29 28 28 29 114 63 177
Total 122 122 177 204 625 445 1,070
All Families 203 198 313 314 1,028 771 1,799

32
4.3 Findings
The initial findings are reported below for intact families and for female-headed families. Table 4.4
summarises the work effort response of intact families. The experimenters detected little difference in the
work effort response to alternative income support plans. That is, the various support levels and benefit
reduction rates did not appear to result in greatly varying levels of work effort. Thus the findings compare
individuals eligible for experimental payments, regardless of the specific plan, with individuals who were
control subjects.
The work effort response of intact families was concentrated among the husbands, who appeared to reduce
their total hours worked by 2.5 hours a week as a result of the experiment. Considering the labour supply
response as a percentage of the control group mean, husbands reduced their hours by 7 per cent. This was
largely the result of the complete withdrawal of a few individuals from the labour force rather than of small
reductions in work effort by most husbands. The researchers noted that the work response in the New Jersey
and Rural experiments was characterised by a marginal reduction in hours worked by many husbands. The
Gary result of complete withdrawal from work by a few husbands may have resulted from the highly
institutionalised and specialised nature of the labour market in Gary. They considered that husbands may not
have been able to make small adjustments to their hours worked, and the only way to reduce work effort was
to quit altogether. Wives in intact families responded by reducing their total work by one hour a week. Given
the low initial work involvement of wives (5.7 hours per week for the control group), this response amounted
to a substantial 17 per cent reduction. The decline consisted of a withdrawal from employment by a few
wives and an across-the-board reduction in hours worked by those who continued to work. Many of the
wives who stopped working remained in the labour force and looked for new work, suggesting that they may
have been looking for more pleasant or more rewarding employment. Overall, these estimates of wives' work
effort response were not statistically significant, partly because of the small number of working wives in the
sample.
For female heads who had received AFDC prior to the experiment, switching to NIT payments resulted in a
minor reduction in work effort of 0.3 hours worked per week, or less than 5 per cent of the control group
mean. This effect resulted from a few female heads who stopped work, rather than from widespread
reductions in hours. The researchers felt that this small reduction reflected the pre-existing work
disincentives in the AFDC program. Switching from AFDC to a more adequate income support program
might not lead to large reductions in labour supply because many female heads had already reduced their
hours of work under AFDC. It was estimated that female heads who were
83
TABLE 4.4: ESTIMATES OF WORK DISINCENTIVES FOR HUSBAND AND WIVES PARTICIPATING IN THE GARY INCOME
MAINTENANCE EXPERIMENT: END OF THE SECOND YEAR
Husbands Wives
Range of Control Per cent of Range of Control Per cent of
Response a/ Mean Control Mean Response a/ Mean Control Mean
For the whole sample
Disincentive effect on:
Hours worked per week -2.5 36.0 -7 -1.0 5.7 -17

Labor force participation -.06 to -.07* .96 -6 to -7 .04 to -.001 .17 +24 to 0
Employment -.05 to -.08* .89 -6 to -9 -.01 to -.03 .16 -6 to -19
For those employed
prior to the experiment -.06 .98 -6 -.20* .77 -26
For those not employed
prior to the experiment -.26* .60 -43 -.02 .07 -29
For those who were employed
at the end of the second year

Hours worked per week -.7 40.4 -2 -5.7 to -4.7 35.5 -16 to -13
Earnings per week -$17.19* $160.95 -11 n.a.
a/ Responses were estimated using two alternative techniques to control for pre-enrolment differences in work effort between the experimental
and control groups. Where different estimates were obtained from the two techniques, both estimates are reported. For more detailed
information on the methods used to derive these estimates, see Kehrer, 1977, pp.43-49.
* Significant at the .10 level of statistical confidence.
n.a. = not available

84
not on AFDC prior to the experiment increased their work effort by 0.3 hours a week, or around 2 per cent.
These findings were statistically insignificant and unstable over time. The sample size of the group was quite
small and not large enough for estimates to be made with confidence. Table 4.5 provides further retails of
work disincentives for female-headed families.
One of the distinctive features of the Gary experiment was the availability of child care subsidies. These
subsidies were available to selected families at varying rates and were contingent on families working or
being engaged in work-related activities. The number of families who used child care programs was much
smaller than anticipated. Fewer than 5 per cent of eligible families used such programs in the second year.
The rate of utilisation generally declined as the subsidy decreased, and utilisation was higher for families
with pre-school children. For families with pre-school children and on the 80 and 100 per cent subsidy plans
with a work requirement, the rate of use was around 15 per cent.
Use of social services was also a major research interest of the Gary experiment. The researchers found that
experimental families used social service agencies less extensively than did control families. Treatment
families reduced their use of such services by 13 per cent.
Studies were also conducted on experimental responses in other areas - the effects of income maintenance on
family consumption, the demand for housing, and the choices teenagers made between school, work, and
leisure. The effects of the experiment on family consumption were investigated by comparing
treatment/control differences in debt, monthly purchases, and acquisition of durable goods over a long
period. The initial findings suggest that treatment families tended to increase their expenditure on clothing,
medicine and automobile repairs, and also to reduce their medical debts. They also spent more on furniture
and home appliances than did the control families. The researchers concluded that experimental payments did
not appear to induce families to move to different housing. Taking those families that did move during the
experiment, public housing residents in the experimental group were about 50 per cent more likely to move
to private housing than comparable control families, and were twice as likely to purchase homes. That is,
experimental payments did not give any impetus to families to move, but among those families who would
have moved anyway, the payments did influence the choice of residence. The experiment appeared to have a
positive effect on school attendance among male teenagers, who tended to reduce their labour force
participation and continue their high school education. There was no apparent effect on school attendance of
female teenagers, and no effect on college attendance for either sex.
85
TABLE 4.5: ESTIMATES OF WORK DISINCENTIVES FOR FEMALE HEADS OF FAMILIES PARTICIPATING IN THE GARY
INCOME MAINTENANCE EXPERIMENT BY PRE-EXPERIMENT AFDC STATUS: END OF THE SECOND YEAR
AFDC Non - AFDC

Range of Control Per cent of Range of Control Per cent of
Response a/ Mean Control Mean Response a/ Mean Control Mean
For the whole sample
Hours worked per week -.3 6.5 -5 .3 14.7 +2

Employment .002 to -.04 .18 +1 to -22 .04 to .001 -.41 +10 to 0
For those employed prior
to the experiment -.11 .65 -17 06 .62 +10
For those not employed
prior to the experiment -.03 .09 -33 -.03 .25 -12
For those who were employed
at the end of the second year
Hours worked per week 3.5 to 2.4 35.9 +10 to +7 -2.9 to +1.3 35.9 -8 to +4
Earnings per week $5.11 $86.9 +6 -6.04 $86.93 -7
Note: None of the estimates of work effort response in this table is large enough to have been unlikely to have occurred through chance.
a/ Responses were estimated using two alternative techniques to control for pre-enrolment differences in work effort between the experimental
and control groups. Where different estimates were obtained from the two techniques both estimates are reported. For more detailed
information on the methods used to derive these estimates, see Kehrer, 1977, pp.43-49.

86
4.4 Comments
As a brief HEW summary is the main source of information available at the time of writing, it is difficult to
comment on the experiment's validity, although a number of observations can be made:
(i) The sample was distinctive in being composed mainly of black, female-headed families. The
generality of the sample was limited, but the experiment was explicitly understood as being
complementary to the earlier income maintenance experiments. Despite this, some of the
administrative procedures were different; for instance, in no two experiments were the accounting
periods comparable;
(ii) Many of the experimental cells were very small in size, e.g. there were only 26 experimental families
with male heads whose pre-test income had been less than half the poverty line. The attrition rate in
the experiment was extremely high, approaching 50 per cent. Attrition may introduce an unknown
bias into the findings if both a family's labour supply and its likelihood of dropping out of the
experiment are related to some unspecified or unmeasured independent variable;
(iii) Associated with these problems of small sample cell size and high attrition were the findings of
negligible effects or unexpected effects. The researchers were unable to distinguish responses to
different NIT treatments. Their findings thus compared individuals eligible for payments, irrespective
of the specific plan, with individuals who were control subjects. Whether this means that individual's
work behaviour does not vary by support level and withdrawal rate or whether the measurement
instruments were not accurate enough to detect responses is unclear. Similarly, the difference in
findings between this and other income maintenance experiments raises doubts about design and
measurement issues. For instance, in Gary much of the reduction in work resulted from male heads
quitting work altogether, rather than reducing their hours. Again, female heads not on AFDC prior to
the experiment actually increased their hours of work relative to the control group. Are such findings
genuine or do they arise from technical flaws in design or analysis? and
87
(iv) In contrast with previous experiments, the Gary sample was not truncated by criteria limiting
eligibility to those with income less than 150 per cent of the poverty line. The problem of estimating
the effects of a permanent program from a temporary experiment remains - there was no attempt in
Gary to use duration as an independent variable and estimate its importance. The attempt to estimate
major non-labour supply responses was unsuccessful. Very few families, fewer than 5 per cent in the
second year, used the child care subsidies intended to provide a major research focus. Finally, the
Gary experiment was expensive, costing around $21 million or over 50 per cent more than the cost of
the New Jersey and Rural experiments combined.
Conclusion: The Gary experiment found modest work disincentive affects resulting from NIT payments.
Husbands reduced their hours of work by around 7 per cent and working wives by 17 per cent; female heads
receiving AFDC prior to the experiment reduced their hours of work by 5 per cent compared to the control
group, while female heads not receiving AFDC prior to the experiment increased their hours of work by
around 2 per cent. None of these findings for hours of work was statistically significant - they could all have
occurred by chance. The absence of detailed information on the Gary experiment, and the fact that the
available findings were preliminary, mean that these comments are tentative. However, it appears that the
Gary experiment experienced problems of sample size, generality and accuracy of measurement similar to
those described for earlier income maintenance experiments.
88
5. THE SEATTLE-DENVER EXPERIMENT
5.1 Background
Origin and objectives: The Seattle-Denver Income Maintenance Experiment (SIME -DIME) was the last and
most comprehensive of the U.S. income maintenance experiments. SIME-DIME represents a considerable
advance over earlier experiments, in relation to objectives, sample characteristics,design features and analysis
of data. The project was funded under a HEW contract with the State of Washington and the State of
Colorado. Experimental design and most data analysis was performed by Stanford Research Institute, with
survey work and simulations carried out by Mathematica Policy Research.
The size of the labour supply response to a negative income tax remained the primary research objective of
the experiment. SIME-DIME also uniquely tested the interactive effects of income maintenance and
manpower programs. In this regard the relevant hypothesis was that manpower training in combination with
a national system of cash transfers would yield an outcome exceeding the sum of the benefits of the two
separate components. In addition, the experiment investigated the effects of a NIT on family stability and
educational decisions.
The SIME-DIME sample included both one-parent and two-parent families, and black, white, and Hispanic-
American families. One-parent white families were not included to any substantial degree in earlier
experiments. The sample size of nearly 5,000 families, compared with the combined total of 4,000 in the
three previous experiments, allowed researchers to estimate response effects with more confidence. As well,
most members of the sample were eligible for payments for three years, some for five years, and a further
subsample were eligible for twenty years in an effort to measure transitory income effects. The experiment
was the first to be conducted in the western United States.
In order to discover the best mix of manpower programs and cash payments, counselling services and
training subsidies were introduced as experimental variables. A declining benefit rate reduction system was
also investigated. In effect, the withdrawal rate on income declined as income increased, concentrating work
disincentive effects on those who worked least, but reducing "notch" problems for families just above the
grant break-even level.
89
The findings of the experiment were analysed by comparing the experimental group with the control group.
The researchers also used a method for estimating how the work incentives that individuals faced under the
existing welfare system would be changed by introduction of a new program. The estimates of work
incentive effects were further used to conduct simulations of national income maintenance programs without
job components and simulations of the Carter Administration's welfare reform proposal, the Program for
Better Jobs and Income.
Duration and cost: Design of the project began in 1969. Seattle families were enrolled between October
1970 and October 1971, and Denver families between November 1971 and August 1972. The basic
experiment extended for three years, although approximately 20 per cent of the sample in both sites
continued on the program for a total of five years. The time horizon was further extended to 20 years for part
of the Deaver sample. In 1977 the projected cost of the experiment was $65.7 million.
Eligibility criteria: In accordance with the objectives of and complementing earlier experiments,
eligibility criteria for SIME-DIME were fairly broad. Participation was not limited by race or sex of family
head, although the family head had to be between 18 and 58 years of age. Income was not an explicit
determinant of eligibility, though high income clearly would exclude participation. Eligible families did not
have to be intact or contain dependent children, but only consist of two or more individuals. There were no
work requirements, and no attempt was made to assure employment opportunities for participants.
Sample selection: Originally, this experiment was to be confined to the city of Seattle in Washington. A
total of 32,000 dwelling units were listed in the major low income areas of the city. On the basis of
interviews conducted in approximately 25 per cent of city households, some 4,500 eligible families were
located and fully interviewed for base-line data; of these families, 2,044 were enrolled as either
experimentals or controls.
In early 1969, when the decision to launch the experiment was made by HEW, unemployment in Seattle was
about 3 per cent, compared with the national rate of 3.5 per cent. In 1970 the aerospace industry, a major
employer in Seattle, suffered a severe recession, and by early 1971 the unemployment rate in Seattle was
10.5 per cent compared with a national rate of 5.5 per cent. It was no longer possible to regard the results of
an experiment in Seattle as representative of the nation, or any significant sector of it. Further, under
conditions of enforced unemployment, the observed level of employment
90
participation and hours of work is not indicative of the desired level, or of actual work incentives. High
unemployment will tend to produce in excessive amount of training and retraining, thus biasing these
responses upwards and, by making adjustment of work hours extremely risky, will tend to reduce the
willingness of a person to change his type of work or place of occupation.
Since unemployment is unevenly distributed, these effects could only be controlled if both experimental and
control groups had nearly identical distributions of unemployment across all people in all industries, in all
age groups and in all occupations. A sampling frame providing this uniformity was not feasible, given cost
and sample size limitations and lack of complete understanding of the variables that determine
unemployment. Instead, the researchers felt themselves presented with a unique opportunity to develop
national estimates of the effects of income maintenance for varying levels of unemployment. The decision
was made by HEW to launch an experiment of identical design in a city that had a socioeconomic structure
and level of unemployment more typical of urban America - Denver, Colorado. The same random selection
process was undertaken and by August 1972, 2,735 Denver families were enrolled.
Characteristics of the sample: There were 4,779 sample families in the Seattle-Denver expe r iment. The
Summary Report (U.S. Department of Health, Education, and Welfare, 1978, p.3) notes that of these
families, 2,063 were white, 1,960 black and 856 Hispanic-Americans.* There were 2,044 Seattle families and
2,735 in Denver. In the combined sample there were 2,744 families with both spouses present and 2035
single-parent families with children. A total of 1,939 families were in the three year sample module, while
789 could receive payments for five years if their income level entitled them to benefits under the rules of the
program. The remaining 2,051 families were in the control group.
Experimental treatments: In SIME-DIME, as in other experiments, a variety of different basic benefit

levels and benefit reduction rates were tested to permit estimation of labour supply effects. Three basic
benefit levels were tested - 92 per cent of the poverty line, 116 per cent, and 135 per cent, or in 1970, $3,800,
$4,800 and $5,600 respectively. By 1976, cost of living adjustments had raised these to $5,150, $6,505 and
$7,590 respectively. Each basic benefit level was adjusted for family size. The lowest basic benefit provided
support nearly the same as that provided by a combination of AFDC and Food Stamps in Colorado and
Washington.
* These numbers do not add to 4,779. The discrepancy is not explained in the Summary Report.
91
The program tested four benefit reduction rates. Two were constant rates of 50 per cent and 70 per cent, and
two rates began at relatively high levels of 70 per cent and 80 per cent where there was no pre-transfer
income but declined by 2.5 per cent for each $1,000 of income. Advantages of using declining tax rates
included:
(i) If a real NIT program were introduced, the negative taxes in the income maintenance program and the
positive tax rates of normal income tax would probably be combined. Depending on the breakeven
point, positive U.S. federal income taxes would be either zero or 14 per cent around this level. An
integration of the negative and positive tax systems will call for the negative tax to decline from the
high initial rates. Thus, a declining tax rate is a more realistic structure;
(ii) Declining tax rates concentrate work disincentive effects on those who work least. Once an individual
decides to work at all, work incentives are enhanced at the margin and will tend to push the individual
towards full employment;
(iii) A high level of initial tax with declining rates is a cheap way of achieving the program's goals;
(iv) A declining tax structure may be consistent with an experimental manpower program in providing a
double incentive for individuals to join the labour force; and
(v) Variations in earned income in modifying declining tax rates will provide observations on many
different marginal tax rates. Families may either respond marginally or radically to different marginal
tax rates, and so may respond very differently to declining rather than to constant reduction rates.
Declining withdrawal rates introduce econometric and practical complications, e.g. calculation of disposable
family income and guaranteeing equity between experimental families of different sizes will be made more
difficult.
A major innovation in SIME-DIME was the addition of an experimental manpower program encompassing
training subsidies and counselling. The principal objectives of the manpower component were to determine
the responsiveness of demand for vocational training to changes in its price, and the effect of investment in
human resources on work effort. The various manpower treatments consisted of training subsidies that
reimbursed either 50 per cent or 100 per cent of the direct cost of any educational program that did not
exceed two years in length.
92
The experimenters felt it was essential to ensure that people making training decisions possessed the same
information. A further counselling component was introduced to offer all eligible members (16 years and
over) of participating families sufficient information about their opportunities and capacities to enable them
to choose among alternative labour market options so that the choice would yield maximum satisfaction. The
counselling service was composed of:-
(i) Assessment, in which each participant determined his labour market objectives, barriers to that goal,
and developed a plan of action to reach those objectives;
(ii) Information services, in which a counsellor provided information relevant to each individual about
present and expected future job market characteristics and available training and community services.
This included help in making employer contacts and applying for jobs, but not direct job placement;
and
(iii) A follow-up phase to ensure continued awareness of the program and to inform individuals of
changing opportunities.
The experimental design provided for the systematic integration of the financial and manpower treatments
described above. There were twelve financial treatment options, comprising four withdrawal rates for each of
the three support levels, and four manpower options, comprising counselling, two levels of training subsidies
and a null treatment. This gave a total of 48 possible experimental cells to which families could be assigned.
Not all of these were used. The declining 50 per cent withdrawal rate and the constant 80 per cent rate were
not tested as the first was believed to be too generous and the second too confiscatory. In addition, 410
control families in Seattle and 596 control families in Denver were offered counselling services, so that the
effect of the counselling treatment itself could be assessed.
Families were allocated to treatment combinations using a form of the Conlisk-Watts model modified to
allow for more families in particular treatment combinations. The allocation was not entirely random as there
was a tendency to assign higher income families to cells with higher support levels and lower withdrawal
rates. The modifications also had the effect of increasing the number of experimental families and decreasing
the numbers of controls. In addition to taking into consideration the size and income of the family in the
assignment process, separate cell structures were created across two variables - race and number of parents. It
was considered that black families and white families with either one or two parents potentially had such
different responses that it was unwise to merge them in one treatment.
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5.3 Findings
The major findings of the Seattle-Denver experiment were reported as differences in hours worked per week
between experimental and control groups. The differences in hours worked were related to pre-experimental
income and were decomposed into changes resulting from increases in income and changes resulting from
variations in wage rate. Findings were reported for husbands, wives and female heads. These findings are
summarised in Table 5.1. The experimenters also analysed differences in work effort between blacks and
whites and between Denver recipients and Seattle recipients, holding other characteristics constant, but they
found no statistically significant differences between these groups.
In summary, for husbands, work declined by between 1.1 and 3.2 hours per week in an average working
week of 33.4 hours. The decline in hours worked fell as pre-program income rose. The control-experimental
differences as a percentage of the control mean showed that husbands reduced their work hours by 6 per cent.
The researchers judged that husbands probably felt constrained to work, and concluded that husbands were
affected relatively little by changes in net wage rates or in income, except at very low initial income levels.
For wives, the experiment had a greater effect on hours worked per week. Decreases ranged from 4.8 to 7.6
hours per week, compared to an average working week for wives of 12.7 hours. These decreases in hours
worked became greater as family income increased. Considering the control-experimental differences as a
percentage of the control mean, wives reduced their hours worked by 17 per cent. As with earlier
experiments, it should be noted that wives' reductions in hours worked, while small in absolute terms, were a
significant proportion of their initially low levels of work. In regard to the greater work reductions associated
with higher family income levels, the researchers noted that wives probably felt the greatest necessity to
work when other family income was low and had more freedom to respond to changes in income or wage
rates when initial income was high.
For female heads, the work response pattern was similar to that for husbands. Female heads reduced their
hours of work by between 1.8 and 4.5 hours per week from a base of 18.8 hours per week, with the greatest
reductions being among those with the lowest pre-program incomes. Considering control experimental
differences as a percentage of the control mean, female heads reduced their work hours by 12 per cent. As
with husbands, female heads may feel constrained to work. As a final observation on these results it should
be noted that the effects of a $1.00 decrease in the wage rate (the effect of the withdrawal rate) were
consistently greater than the effects of a $1,000 increase in income (a component of the basic guarantee).
94
TABLE 5.1: ESTIMATED EXPERIMENTAL EFFECTS ON HOURS WORKED PER WEEK *
Pre-program Income Level

2000 4000 6000 8000 10000
Husbands
Estimated change in - .96 - .81 - .65 - .50 - .35
hours resulting from
a $1,000 increase in
income
Estimated change in -2.29 -1.91 -1.53 -1.15 - .77

a $1.00 decrease in
wage rates
Wives
Estimated change in -1.95 -2.34 -2.73 -3.13 -3.52
income

$1.00 decrease in
wage rates
Female Heads
Estimated change in -2.04 -1.56 -1.09 - .62 - .15
income

a $1.00 decrease in
wage rates
* Hours per week averaged 33.4 for husbands, 12.7 for wives, and 18.8 for female heads. The sample size
was 1,592 for husbands, 1,698 for wives and 1,358 for female heads. The sample size was smaller for
husbands than for wives because couples who were separated or divorced during the experiment were
included in the sample, and the attrition rate was higher for ex-husbands than for ex-wives.
SOURCE: U.S. Department of Health, Education, and Welfare, 1978, p.11.

95
Simulations of National Programs
The Seattle-Denver experiment also employed data analysis methods that were more sophisticated than
techniques used in previous experiments. Data were analysed through an estimation procedure measuring
how the work incentives that individuals faced under the existing welfare system would be changed by the
introduction of a new program, and through econometric simulations of a variety of national income
maintenance programs, some without job components and one identical to President Carter's welfare reform
proposal - the Program for Better Jobs and Incomes.
The estimation methodology allowed researchers to measure the effects of different experimental plans while
isolating the effects of differing personal characteristics among groups. The procedure then utilised two
variables to represent the net changes caused by the various payment plans in the experiment - the first
variable measured changes in family income resulting from a new program in the absence of any adjustment
in hours worked, and the second measured the changes in individuals' net wage rates due to the program's
benefit reduction rate. The estimates produced by this procedure indicated how individuals would adjust their
work effort in response to changes in the amount of transfer payment or in the size of the reduction rate. The
results of the experiment could then be generalised to the national population and to transfer programs that
differed from those used in the experiment. This required further information on how current as well as
proposed tax and transfer programs affected people's income and net wage rates. Data on participants that
were collected before the experiment began were used for this purpose.
The simulations represented a further step in this procedure. The effect of a new NIT program on the net
wage and total income of an individual whose hours of work did not change was calculated by comparing
provisions of the existing tax and transfer system to the provisions of the new program. The estimates of
work response derived from the earlier procedure then were used to predict the changes in hours that would
occur in response to these changes in income and net wage. The payments that would be received once work
effort had adjusted to the program were then calculated. By using this procedure on a nationally
representative sample of families, researchers were able to simulate the total effects on work effort of a
number of alternative programs, and to estimate program costs both before and after the recipients adjusted
their labour supply.
96
The Micro-analysis of Transfer to Households (MATH) model was used for the program simulations. The
MATH model used a set of data on the characteristics of families and information on the structure of tax and
transfer programs to estimate what government transfers families would receive under any particular plan,
and what their hours of work response would be. 1974 income data were used for the simulations, so the
resulting estimates apply only to that year, and would vary in different years depending on income and
unemployment levels and changes in the tax structure.
The model also contains a number of simplifying assumptions. It was assumed that people whose income is
above the tax break-even level do not reduce their hours to make themselves eligible, that people on a
temporary experimental program behave exactly as they would on a permanent program, and that people
with different personal characteristics in regard to age, education, etc., respond in the same way to changes in
income and net wages. It was also assumed that work behaviour in Seattle and Denver was representative of
the rest of the country. The experimenters noted that these assumptions may lead to either underestimates or
overestimates of work response and may specifically affect estimates of program costs. These assumptions
should not affect comparisons between programs comparisons of differences in response to different basic
benefit levels or reduction rates, or differences in response by family types.
A number of alternative cash assistance programs were simulated with the MATH model, as shown in Table
5.2. Table 5.3 summarises cost estimates derived from these simulations. The simulations and the estimates
of national program costs illustrate the conflicts or trade-offs involved in negative income tax plans. The
plans illustrated are of basic benefits at 50, 75 or 100 per cent of the poverty line and benefit reduction rates
of So per cent or 70 per cent. For instance, a program with a basic benefit at 50 per cent of the poverty line
and with a 50 per cent benefit reduction rate (50-50 NIT) would have reduced hours worked by intact
families by 13 per cent, would cover 3.7 million families, and save $260 million over the existing AFDC-
Food Stamps program. A 100-50 NIT would have covered 10.3 million families and would have increased
program costs by $22 billion. Again a 50-50 NIT would cover 3.7 million families but a 50-70 NIT would
cover only 2.9 million families. A 75-50 NIT would cover 6.4 million families and a 75-70 plan 4.5 million
families.
97
TABLE 5.3: AVERAGE LABOUR SUPPLY RESPONSES OF FAMILIES RECEIVING GRANTS
Basic Benefit Average Hours Change Percentage Participating

per year in Change Families
Before Response Hours (Millions)
50 Per cent Benefit Reduction Rate
50 Per cent of Poverty Line
Husband-wife families
Husbands 1,381 -166 -12
Wives 353 - 66 -19
Total 1,734 -232 -13 1.6
Female family heads 435 5 1 2.1
Husbands 1,550 -155 -10
Wives 386 -101 -26
Total 1,936 -256 -13 3.7
Female family heads 602 - 43 -7 2.7
Husbands 1,716 -136 -8
Wives 437 -149 -34
Total 2,152 -286 -13 7.1
Husbands 1,213 -246 -20
Wives 332 - 66 -20
Total 1,545 -312 -20 1.0
Female family heads 327 -6 -2 1.9
Husbands 1,326 -234 -18
Wives 343 - 95 -28
Total 1,669 -328 -20 2.1
Husbands 1,459 -223 -15
Wives 376 -129 -34
Total 1,836 -352 -19 3.7
98
It is clear that variations in the basic benefit or in the reduction rate can have significant implications for the
number of families participating in a scheme, the payment to each family, and the total program cost. The
table also indicates that given differing numbers of participants according to NIT plan, and given the 1974
income distribution of those participants, the combinations of benefit level and reduction rate also reflect the
aggregate of average hours worked per year before the response and consequently the change in hours
worked, and the net program costs due to the response. For instance, the net program costs due solely to the
estimated changes in labour supply range from $330 million for the 50-70 plan to $2.8 billion for the 100-50
plan. For the 75-70 plan, 27 per cent of the estimated costs would result from reductions in labour supply.
These estimates of program costs also contain a number of simplifying assumptions. In order to calculate net
costs it was assumed that Federal and State income taxes and Social Security taxes were reimbursed by the
simulated programs, and that the programs would replace the existing AFDC and Food Stamps programs. It
was also assumed that every family whose income would entitle it to a grant or tax rebate would participate,
when actually about 10 per cent of eligible AFDC families do not participate in that program. The number of
people who would participate in a NIT program would depend on the size of the grant, work requirements,
administrative complexity and other related factors. The assumption of complete take-up of benefits would
lead to overestimates of program costs.
The Summary Report of the Seattle-Denver Income Maintenance Experiment (U.S. Department of Health,
Education, and Welfare, 1978, pp.23-50) goes on to discuss further simulations - NIT plans that would make
no one currently receiving AFDC worse off, alternative methods of tax relief for those just above the grant
break-even level, and the Carter Program for Better Jobs and Incomes. The report also makes a comparison
of two equal cost programs, one a 75-50 NIT and the other a 90-70. By directly comparing two programs that
are nearly the same in overall budgetary cost, the trade-offs already referred to are highlighted - the extent of
coverage, the impact on individual or family poverty, the degree of redistribution, the varying labour supply
effects and the worsened situation of some current welfare recipients.
The only aspect of non-economic outcomes yet analysed in SIME-DIME has been the effect of NIT
payments on marital stability. It was found that NIT payments had little impact on the rate at which single
women with children married, except in the case of Mexican-Americans. For each group analysed (blacks,
whites and Chicanos) income maintenance payments substantially raised rate of marital dissolution. The
researchers accounted for these results in terms of non-linear "income" and "independence" effects. They
theorised that the
99
TABLE 5.3: ESTIMATED 1974 NATIONAL NET PROGRAM COSTS BEFORE AND AFTER RESPONSE FOR FAMILIES RECEIVING
GRANTS
Basic Benefit Net Program Costs Net Program Costs Net Program Costs Participating Total Labour
Before Response After Response Due to Response Families Supply Response
(Billions) (Billions) (Billions) (%) (Millions) (1000 Person-Years)

Husband-wife families 1.37 1.74 .38 22 1.6 - 132
Female-headed families -2.00 -2.00 .01 2.1 5
Total -.63 -.26 .37 3.7 -176

Husband-wife families 5.34 6.45 1.10 17 3.7 -457
Female-headed families .49 .61 .13 21 2.7 -55
Total 5.83 7.06 1.23 17 6.4 -512

Female-headed families 4.01 4.32 .31 7 3.1 -129
Total 19.11 21.92 2.81 13 10.3 -1101
100

Husband-wife families 1.03 1.35 .32 24 1.0 - 157
Female-headed families - 2.00 - 1.99 .01 .2 5
Total - .98 - .64 .33 1.2 - 162
Basic Benefit Net Program Costs Net Program Costs Net Program Costs Participating Total Labour
Before Response After Response Due to Response Families Supply Response
(Billions) (Billions) (Billions) (%) (Millions) (1000 Person-Years)
75 Per cent o f Poverty Line

Husband-wife families 2.98 3.93 .95 24 2.1 -337
Female-headed families - .05 .10 .15 155 2.4 -54
Total 2.93 4.03 1.10 27 4.5 -391

Female-headed families 2.85 3.22 .38 12 2.8 -122
Total 10.02 12.41 2.39 19 6.5 -753
Columns may not add to totals due to rounding.

Percentage not computed when base is negative.

101
"income effect" decreased the rate of marital dissolution by increasing the family's economic well-being. The
"independence effect" increased the dissolution rate by reducing the economic dependence of the wife on the
marriage.
5.7 Comments
The findings reported above are based only on the second year of the experiment, and in any case, few details
of the characteristics of the sample, the actual events of the experiment or the non-labour supply results are
available. Even a tentative assessment of the experiment is premature, in the light of available literature,
although some general comments can be made on its promise.
The sample size of 5,000 families offers the possibility of more accurate estimates of research results. The
varying duration of the experiment for different subsamples - 3, 5 and 20 years - for the first time raises the
possibility of considering duration as an independent variable, and resolving whether the effects of a
temporary experiment can be extrapolated to a permanent program. The declining withdrawal rate and the
counselling and training treatments introduce significant policy considerations that may make experimental
treatments more like a NIT finally adopted in the "real world". The problem of high unemployment in Seattle
needs to be balanced against these possible advances. High unemployment levels made Seattle
unrepresentative of the U.S. and complicated analysis of actual work incentives. The selection of the Denver
site for purposes of comparison permitted the consideration of unemployment as an independent variable for
analysis. The preliminary findings of no statistically significant differences between labour supply responses
in the two cities would seem problematic, in view of the very different nature of the sites. A final observation
is that the Seattle-Denver experiment was extremely expensive. At a cost of $65.7 million (as estimated in
1977), it is to be hoped that the substantial innovations in design will prove valuable.
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6. MINCOME MANITOBA
The Canadian Basic Annual Income Experiment commenced operations in 1975 and payments were finalised
in 1978. Only a brief overview of the experiment was available at the time of writing. This does not give
details even of initial sample size or of sample characteristics. A data base collected through interviews and
through the payments system has been assembled and, together with scientific and technical documentation,
was to be delivered to the Canadian government by 31 March 1979. Apparently, no experimental findings
have been reported. The following discussion of Mincome Manitoba deals only with the background to the
experiment, design features, and the research potential of the data base, and as far as possible fits this
analysis within the framework used to summarise the features of the U.S. experiments.
6.1 Background
Origin and objectives: During the latter part of the 1960s, Canada shared with the United States a
considerable concern about the extent of poverty within an affluent society and an interest in the state of the
overall welfare system. In April 1965 there was another "Declaration of War on Poverty" in the Speech from
the Throne and a Special Planning Secretariat was established to coordinate anti-poverty policy. This concern
was further expressed in the 1970 Report of the Royal Commission on the Status of Women, the 1970 White
Paper on Income Security, the 1971 Report of the Special Senate Committee on Poverty, and the "Real
Poverty Report" of the same year. The latest indication of these public policy interests has been in the
FederalProvincial Social Security Review operating between 1973 and 1976.
It was the Economic Council of Canada, in its 5th Annual Review in 1968, that most strongly brought
attention to the problem of poverty. The Council defined as poor those using 70 per cent or more of their
income for the basic requirements of food, clothing and shelter. By that standard, in 1961 there had been 4.2
million (non-farm) Canadians in poverty, including 1.7 million children under the age of 16. That is, 27 per
cent of the Canadian population were poor; using an expenditure of 60 per cent on food, clothing, and shelter
as defining "straitened circumstances", the proportion rose to 41 per cent. Poverty was most strongly
experienced among minority groups - Indians, Eskimos, French Canadians and Metis - and was most
common in the Maritimes - Prince Edward Island, Nova Scotia, New Brunswick and Newfoundland. And yet
the poor were most concentrated in the richest provinces of Ontario and Quebec, and the greatest proportion
of the poor were in intact families where the head worked.
103
The Canadian income security system is somewhat similar to that of the United States, in comprising social
insurance programs and public assistance or welfare. Canada has also relied heavily on the use of
demogrants, principally Old Age Security (OAS), which is a flat rate, free of means test benefit payable to all
persons aged 65 and over. Until 1965, the chief social insurance benefits were the short term unemployment
benefits. In that year, the social insurance system was extended by the establishment of the Canada and
Quebec Pension Plans to include old age, widows and survivors, and disability benefits. As in the U.S., these
social insurance programs are contributory and benefits are related to past earnings. In addition, Canada has a
Family Allowances program, broadly similar to that of Australia, and has recently added a Guaranteed
Income Supplement (GIS) payable to OAS pensioners, and a refundable child tax credit.
In the 1960s concern with the welfare system paralleled that in the United States. Welfare was seen as
inefficient, as stigmatising recipients yet allowing freeloading and fraud, as subject to spiralling costs yet
incapable of effectively helping the poor, as producing gross inequities between regions and categories of
assistance yet intruding into the responsibilities of provinces and municipalities. "The Real Poverty Report"
described the Canadian public assistance system as "an elephantine structure ... shot through with an
unspoken but absolute faith in the worthlessness of the human character" (Adams, Cameron, Hill and Penz,
1971, p.170). The Special Senate Committee on Poverty found the welfare system to be "increasi ngly unable
to deal with the needs of its clients ... punitive and demeaning ... a mess - a social wasteland and an economic
morass" (1971, p.169).
This welfare system had developed in the context of a somewhat uneasy arrangement in the Canadian federal
system by which provincial and local autonomy in the assessment of how much should be given to the poor
was vaguely underwritten by the British North America Act. Specifically, the Federal Government
contributed to provincial social assistance costs under four Acts: the Old Age Assistance Act (1951), the
Blind Persons Act (1951), the Disabled Persons Act (1954) and the Unemployment Assistance Act (1956). In
1966 the Canada Assistance Plan (CAP) replaced previous federal-provincial public assistance arrangements.
Under the Plan, the Federal government contributes 50 per cent of shareable costs of provincial and
municipal expenditures for public assistance and welfare services. The eligibility requirement specified under
the Plan is that of need, to be determined by the provinces through an assessment of budgetary requirements,
and clients' income and resources. Rates
104
of assistance are set by each province so that they can be adjusted to local conditions and the needs of special
groups. The provinces agreed to remove all residence requirements and to provide an appeals procedure for
determining eligibility. By 1973-74 the Federal Government was making payments of around $300 million a
year under CAP.
Despite this major initiative in public assistance, real inequities between Provinces remained. For example,
the Special Senate Committee on Poverty noted that a family of four in Hull (Quebec) received $100 a month
less in general welfare assistance than a family of similar size across the river in Ottawa (Ontario). In 1970
provincial welfare rates ranged from $188 monthly in New Brunswick to $335 in Alberta; the annual average
was $2,905, but the range of welfare payments was from $2,251 to $4,020. There were also inequities
between categories of assistance and problems associate with low minimum wage rates in certain provinces.
A couple on Social Assistance with Family Allowances in New Brunswick in 1973 could receive $2,124
annually, a couple over 65 on Old Age Security - Guaranteed Income Supplement (OAS-GIS) received
$3,895, while a couple receiving assistance through a Local Initiatives Project (LIP) could be paid $4,784. In
many provinces welfare payments were greater than the minimum wage. In 1973 a couple with three children
in Prince Edward Island might receive $2,864 annually if employed at the minimum wage and receiving
Family Allowances, while Social Assistance and Family Allowances for such a family amounted to $3,905
annually.
The Canada Assistance Plan failed to correct these inequities as initiative for social programs was left at the
local level. The Plan, for instance, provided for assistance to the working poor, yet Alberta was the only
province to consistently provide help to this group under CAP. The working poor constituted the largest
poverty group - of the 832,000 poor families defined by the Senate Committee, 525,000 or 63 per cent
contained heads in the labour force.
Within this context, reform of the welfare system was given high priority. The Senate Special Committee on
Poverty (1971, p.xvi), in recognising the failure of the welfare system to provide for the working poor,
advocated the alternative of a negative income tax, with a guarantee at 70 per cent of their poverty line and a
reduction rate of 70 per cent. The 1968 Review of "The Problem of Poverty" by the Economic Council of
Canada referred to the New Jersey experiment. The 1970 White Paper on Income Security for Canadians also
drew attention to the U.S. experiments and noted the need for further study and investigation in Canada. As
in the United States, the concern with work incentives was
105
perceived to be central to these considerations. One of the designers of the Basic Annual Income
Experimental Project noted that the experiment was "a response to the recognition in the late 1960s that
many of Canada's poor were low-wage earners who, because they were working, were not eligible for
income assistance" (Powell, 1979, p.38). The most controversial policy issue relating to negative income tax
remained the question of its effects on labour supply and productivity. In Canada, as in the United States, in
Britain and in Australia, the contention that welfare programs undermine the work ethic has had an
impressive and an enduring history.
In 1971 the Minister for National Health and Welfare announced the establishment of a fund to cover 75 per
cent of the cost of income maintenance experiments, and called for cooperation from the provinces. Ontario
declined the opportunity of participation, charging that such experiments simply would duplicate U.S. data.
Manitoba expressed interest, and in 1973 submitted a formal research proposal. In the same year the two
governments reached an agreement covering cost sharing arrangements and their respective roles. The
experiment was collectively designed by officials of Mincome Manitoba, the Manitoba Department of Health
and Social Development, and the Policy Research and Strategic Planning Branch of the Department of
National Health and Welfare. Mincome Manitoba was the agency established to administer the project and
was responsible for all experimental operations. A formal Agreement Concerning a Basic Annual Income
Experimental Project was signed in June 1974, and experimental payments commenced in 1975.
The objectives of the Manitoba Basic Annual Income Experiment were broadly similar to those of the U.S.
negative income tax experiments. The experiment was designed to measure the effects of various tax rates
and support levels on work and earnings. The labour supply response to an income-conditioned cash transfer
program was important for estimating the cost of any NIT program and the costs arising from resultant
changes in total output and productivity. The experiment was also designed to measure other behavioural
responses and to shed some light on how income maintenance affects the general quality of life of
beneficiaries. Finally, it was intended to monitor administrative methods and procedures, as the effectiveness
of these procedures could be instrumental in determining the success and the costs of any income assistance
program.
In detail, the research objectives were as follows:-

106
(i) Behavioural impacts - to examine the impact of various negative income tax parameters on -
• hours of work and labour force participation
• investment in human capital
• job satisfaction, self-esteem, achievement, motivation and life satisfaction
• geographic mobility
• family decision-making and family stability, and
• stigma, perceived and/or generated.
(ii) Market impacts - to estimate the impact of the negative income tax system on -
• wage rates
• relative wage structure, and
• rent levels.
(iii) Administrative research -
• to estimate the relationship between the length of income reporting periods and the accuracy of
information supplied in self-administered income report forms, and
• to estimate the overall cost of administering programs, the efficiency of administrative

procedures and the participants' comprehension of administrative structures.
Duration and cost: Experimental payments started in January 1975 and ended in 1979. The cost of the
experiment was $17.3 million, of which 75 per cent was provided by the Government of Canada and 25 per
cent by the Province of Manitoba.
Eligibility criteria: No explicit statement of eligibility criteria for Mincome Manitoba was available at the
time of writing. The sample was to be stratified by family type and normal income. The types of family
structure considered relevant were intact families (both spouses working), intact families
107
(one spouse working), single parent families and single individuals. Presumably, any families of these types
were eligible for experimental treatments. The cut-off level of annual income in the year prior to the
experiment was $13,000 for a family of 2 adults and 2 children. This amount was adjusted by a Reporting
Unit Size Index (RUSI) - in effect, an equivalent income scale - which was developed to provide similar
minimum standards of living to all family sizes and hence offer a "neutral" support structure that did not
discriminate against any type of family. The cut-off level of income for families was $13,000 times the
appropriate RUSI. The RUSI is shown in Table 6.1. Detailed information on how the index was derived is
not available.
TABLE 6.1: REPORTING UNIT SIZE INDEX (RUSI)
Number of Adults Other Than Family Heads
Reporting
Unit Size 0 1 2 3 4 5 6+
1 .38
2 .71 .71
3 .88 .97 .97
4 1.00 1.14 1.23 1.23
5 1.10 1.26 1.40 1.49 1.49
6 1.20 1.36 1.52 1.66 1.75 1.75
7 1.30 1.46 1.62 1.78 1.92 2.01 2.01
8 1.40 1.56 1.72 1.88 2.04 2.18 2.27
9 1.45 1.61 1.77 1.93 2.09 2.23 2.32
10 1.50 1.66 1.82 1.98 2.14 2.28 2.37
11 1.55 1.71 1.87 2.03 2.19 2.33 2.42
12+ 1.60 1.76 1.92 2.08 2.24 2.38 2.47
SOURCE: Rikel, Laub and Powell, 1974, p.20.
Sample selection: The experimental sample was divided between a "dispersed sample", consisting of a
stratified random sample from the City of Winnipeg and a stratified random sample from several other
smaller rural Manitoba communities, and a "saturation sample", consisting of a single community - the town
and rural municipality of Dauphin - wherein all families and individuals were eligible to apply for enrolment.
The "dispersed sample" was generated by pre-experiment interviews and an assignment model adapted from
the Conlisk-Watts model used in previous U.S. experiments.
108
The Dauphin "saturation sample" was used as it was thought important to include a single site where, as in
the real world, the entire community might be eligible for NIT payments. As a result the experimental effects
should be closer to those of an actual program, the administrative lessons would be derived from a more life-
like setting, and information on community effects would be provided. Only one NIT treatment could be
employed since any inequities introduced into a single saturated community would quickly become obvious
to the participants. There could also be the problem of experimental effects being influenced by an
exogenous shock peculiar to the saturation site, as had happened in the Seattle experiment. The
experimenters attempted to control for these factors by obtaining a great deal of background information. As
well, there were other treatment families on the same financial treatment in the "dispersed sample", thus
providing some degree of control for the saturation site.
In the first year of the experiment it was found that an unacceptably large proportion of families had higher
incomes than predicted from the estimates of normal income, and thus were receiving very small payments.
The attrition rate was higher than anticipated, and further information suggested that households of policy
relevance had been omitted from the original sample. Subgroups of the sample were augmented one year
after payments had originally begun by a supplementary sample restricted to the Winnipeg site and confined
to those household types and income strata for which the current sample sizes were thought to be inadequate.
The treatment of the supplementary sample was identical to that of the original sample, but commenced and
finished one year later.
Characteristics of the sample: The main summary of the Manitoba Basic Income Experiment does not
provide information on the original sample size or the attrition rate. There were 963 families or individuals
who remained, in the "dispersed sample" throughout the three years of the experiment. There were 286 such
participant units in Dauphin, and a further 82 units who had enrolled in Dauphin at various times when the
experiment was underway. The supplementary sample who continued to be interviewed consisted of 236
units. Therefore, the total sample available for analysis consisted of 1,567 individuals and families. No
details of other characteristics of the sample are available.
Experimental treatments: In contrast with the U.S. experiments, guarantee levels were not specified as
percentages of a poverty line, but were set after consideration of existing transfer and tax programs and were
designed to extend over all policy relevant levels and be broad enough to permit separate measurement of
their effect. When the experiment commenced in January 1975
109
the three guarantee levels were $3,800, $4,800 and $5,800 per year for a family of four. The payments were
adjusted to maintain approximately their real value over the three years of the experiment. For instance, in
1977 the payments were $4,982, $6,114 and $7,246. Payments were adjusted according to the pre-determined
family size index which balanced economies of scale in family consumption against the incentive inherent in
the index for the family to split into small units. The three withdrawal rates were also chosen - 35 per cent, 50
per cent and 75 per cent - bearing in mind that the rate should not be so high as to substantially remove the
work incentive, and that the cost of the experiment would, in part, be a function of the withdrawal rates used.
This resulted in 7 negative income tax plans plus the control group being used in the experiment, as shown in
Table 6.2 below.
TABLE 6.2: TREATMENT COMBINATIONS IN MINCOME MANITOBA
Guarantee Tax Rates
35% 50% 75%
Low X X -
Middle X X X
High - - X X
Source: Health and Welfare Canada, 1978, p.11.
6.3 Analysis of Data
More than the U.S. experiments, Mincome Manitoba has advertised itself as a potential data source for social
analysis. A data base, assembled through the interviews and the payments system, together with
documentation, was to be delivered to the Federal Government by 31 March 1979. As yet there is no
indication whether this deadline was met and if so what are the characteristics of the data. The experimenters
described this then potential data base as the only body of micro-data in Canada which could provide
continuous information over a three year period on families and individuals. They foresaw that this
information would permit studies of issues not specifically related to a guaranteed income, i.e. the relative
importance of various causes of poverty, the kinds of occupations of the working poor and the benefit
structures associated with these occupations, housing characteristics of low income families, job search, child
arrangements of families, and the importance in total income of other cash or in-kind benefits, such as
workers' compensation, unemployment insurance and housing subsidies. However, the major thrust of the
experiment
110
was to generate data for research into the impact of income-conditioned transfers on work related activities.
The general methodological approach to be used by the experiments is to develop behavioural models from
existing economic theories and to test these models in the most rigorous fashion that the data will allow.
Little reliance is to be placed on simple statistical comparisons of dependent variables for experimental
families vis-a-vis control families, or comparison of dependent variables for experimental families before,
during and after receipt of NIT payments. Rather, structural equations in behavioural models are to be tested.
This type of model building involves the use of simultaneous equations of family behaviour, with attempts
being made to include time and budget constraints. The experimenters felt that such regression techniques,
similar to those used in analysing U.S. data, would provide greater control in relation to exogenous shocks
and would also have far greater explanatory power - they could explain "why" changes occur, not merely
measure the extent of changes. The labour supply theory already discussed is the basis for analysis of
changes in work effort, although the experimenters proposed in 1974 to give consideration to time spent at
non-market work, allowing the simple work/leisure dichotomy to be discarded. In general, the behavioural
models would involve analysis of dependent, control and treatment variables. Familiar dependent or response
variables would include labour force participation rates and total hours of work. The treatment of
independent variables are the seven combinations of guarantee levels and withdrawal rates. The control or
intervening variables include pre-enrolment value of the dependent variables, and socialpsychological
variables such as achievement, motivation, extrinsic and intrinsic work motivation, job satisfaction, life
satisfaction and self-esteem.
6.4 Comments
A final assessment of Mincome Manitoba clearly is premature. Consideration of the documentation and the
data base would be required for a judgement of the experiment's success or otherwise, and analysis of the
data base and experimental findings must precede conclusions about the experiment's contribution to the
work incentives debate. Yet the Overview of the Basic Annual Income Experiment published by Mincome
Manitoba in December 1978 makes a number of significant claims for the potential value of the experiment.
Mincome Manitoba benefited considerably from the U.S.
experiments, particularly as much of the documentation and findings of these experiments were available by
1975 when the Manitoba experiment commenced. In referring to operational and design problems of the U.S.
experiments, the Canadian researchers expected the Manitoba findings to resolve some outstanding research
issues and thereby contribute significantly to policy
111
debate. The main advance offered by the Manitoba experiment is in the saturation sample. Other income
maintenance experiments have all utilised randomly drawn dispersed samples. Dispersion ensures that
individual responses are not confounded by macro-effects, and makes it possible to vary NIT parameters
within the dispersed sites. This is a highly artificial treatment as families are not exposed to the same
situation as in a national program. Work responses that involve social interaction, for example, increased
leisure, may be moderated by the fact that other members of the community or close friends are not
participating in the experiment.
A number of problems are associated with saturation sampling. Only one set of NIT parameters can be used
when an entire community knows it is part of an experiment. As previously noted, this may lead to problems
of experimental control. A possible example of this problem is seen in reports of hostility to the experiment
from businesses in the Dauphin saturation site. By its nature, an experiment in a small community will attract
attention - suggesting that a very significant Hawthorne effect may operate. For instance, a saturation site like
Dauphin, knowing that its response may be instrumental in determining the parameters of a national program,
may self conciously behave "responsibly", or there may be strong social pressures for people to continue
working as much as possible.
There have been a number of reports of other problems associated with Mincome Manitoba. First, Manitoba
is a poorer than average province. In 1969, 31 per cent of Manitobans were in poverty, compared with a
national average of 27 per cent; more than half of all Manitobans would have been eligible for experimental
payments (Cleverley, 1974). Second, some treatment combinations were less generous than welfare, and
extremely detailed interviews were demanded of experimental families. This resulted in a reported attrition
rate of 50 per cent in the Winnipeg sample, rendering it too small for analysis. There have also been reports
that severe winters forced the researchers to abandon certain rural surveys.
There is not a great deal of secondary material on Mincome Manitoba. The major criticism offered in the
available literature has referred to the policy relevance of the experiment. From its beginnings the experiment
has been seen as a component of a specific policy process, and contributing to fundamental changes in the
Canadian welfare system (Cleverley, 1974, 1975, 1976). It was expected to contribute to the ongoing joint
Federal-Provincial review of Canada's social security system. As with U.S. experiments, political
developments may have rendered Mincome Manitoba irrelevant. The Canadian Government has already
opted for a refundable Child Tax Credit.
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Tax credits of $200 per child, reduced by 5 cents for every dollar of net family income above $18,000 p.a.,
were first paid in 1979. The main feature of the tax credit is that people receive the full amount even when it
exceeds the full amount of tax otherwise payable or the family pays no tax. The tax credit, in effect, is a form
of GMI restricted to families with children. It has been asserted that the system of tax credits, together with
other features of Cananda's income security system - Family Allowances, the Guaranteed Income
Supplement, health insurance and unemployment insurance - make the need for a NIT program less
compelling. Gripton (1977, p.38) has concluded of Mincome Manitoba that:
"the social field experiment is likely to be a quixotic research adventure rather than a promising
instrument for policy analysis".
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7. CONCLUSION
This paper commenced by asking whether people who are paid a guaranteed income will reduce their hours
of work or give up work entirely. The four U.S. experiments under review gave no indication of massive
work reductions: husbands' hours of work declined by between 1 and 7 per cent; hours worked by wives fell
by between 17 and 31 per cent; overall, the work effort of these families declined by between 8 and 13 per
cent; female heads of families, who were studied only in Gary and Seattle-Denver, reduced their work hours
by between 2 and 12 per cent. Table 7.1 details the main features of the experiments -location, timing,
sample size, eligibility criteria and experimental treatments - and Table 7.2 summarises the experimental
findings.
These findings, rather than simply answering the initial question, raise further interrelated questions. Are
these results conclusive and what do they tell us about labour supply behaviour? How relevant are the results
and experiences of the U.S. and Canadian experiments to Australia - to the labour supply behaviour of
Australians, to proposals for a guaranteed income, to possible social experiments? Finally what is the
relationship between social experimentation and public policy and how useful is experimentation as a method
of evaluating social programs? Or more simply, why experiment?
7.1 Work Incentives and Income Security - Answering Policy Questions
In discussing the New Jersey experiment, Rossi and Lyall (1976) describe themselves as "unabashed
admirers of the researchers and their accomplishments" (p.7). Even so, their admiration for the experiment is
heavily qualified:
"... The four sites are a haphazard sample of convenience. Inter-site variances of some appreciable size
raise questions whether this sample is a reasonable base from which to make estimates that would hold
for the New York - New Jersey - Pennslyvania urban areas, let alone urban areas in the United States "
(p.179);
"... In asking what can be learned from the experiment one confronts directly the frustration of an
ungeneralisable sample representing no universe directly useful for the purposes with which the
Congress, the Administration, or those interested in welfare policy alternatives are concerned" (p.179);
"... A consistent theme ... has been a plaintive regret that the important variables relating to work
response were not measured more adequately" (p.185);
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TABLE 7.1: COMPARISON OF U.S. AND CANADIAN WORK EXPERIMENTS
ITEM NEW JERSEY RURAL. GARY SEATTLE-DENVER MINCOME MANITOBA

Site(s) Trenton Duplin County, Gary, Indiana. Seattle Denver, Winnipeg,
Paterson-Passaic, North Carolina. Washington, Colorado. Dauphin and
Jersey City, New Pocahontas and Rural Counties,
Jersey. Scranton, Calhoun Counties, Manitoba.
Pennsylvania. Iowa.
Total Period
of Study 1967-74 1968-76 1971-77 1970-1991 1974-
Period of
Field Work 1968-72 1970-72 1971-74 1970-76 1971-91 1975-78
Time Horizon
(years) 3 3 3 3,5 3,5,20 3
SAMPLE SIZE-
Initial 1,216 809 1,799 2,043 2,578 n.a.
Final 983 729 967 n.a. n.a. 1,567
ELIGIBILITY-
Race Age of Head Sex ALL 18-58 Male Black,White 18-58 Black 18-58 Both All 18-58 Both Any All n.a. Both Any Above
of Head Type of Family Intact Under Male Any Under Any Above and Above and Below 150% and Below 150%
Income Relative To 150% 150% Below 150%
Poverty Line
TREATMENT VARIABLES-
Support Levels
(% of poverty line) 50,75,100,125 50,75,100 75,100 100,126,148 ($3,800, $4,800, $5,800)
Tax Rates (per cent) 30,50,70 30,50,70 40,60 50,70,70-0.25y,80-0.25y 35,50,75
Number of
Experimental
Combinations 8 5 4 11 11 7
SOURCE: Ferber and Hirsch, 1978, p.1386, and, Health and Welfare Canada, 1978, pp.7-21.
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"... The known and suspected deficiencies in the income, earnings, and hours worked series are defects
that increasingly undermine the credibility of the research findings" (p.187);
"... The inattention shown to the details of obtaining accurate measurements of the basic labour supply
variables was surpassed by an even greater casualness in the specification of other areas of interest ...
Analysis of consumption affects ... rest on faith in the analysts' abilities to patch things up with
ingenuity and intuition ... Benign neglect also characterises the measurement of the non-economic
variables ... The main method of developing measures ... was the wholesale borrowing of instruments,
good and bad, from previous studies that had enough notoriety to come to the attention of the
researchers" (p.187);
"... The basic variables measuring work response are defective in quality so that we cannot be sure that
measurement defects have not swamped (or perhaps exaggerated) whatever NIT payment effects 'really
exist'. And the findings themselves, ignoring the design defects, are frustratingly inconclusive, even for
the restricted sample examined" (p.189);
"... In our view ... it would be a mistake to regard the experiment as having provided definitive
estimates of what work responses or other responses would be to a national NIT program" (p. 191).
Rossi and Lyall are far from unremittingly negative about the New Jersey experiment. They point out that as
the first major social experiment it represented a considerable administrative achievement - "the field
operations proved to be flexible, humane, and operable within the confines of budget and time allowances"
(p. 188). It may be significant that those who most highly praise the negative income tax experiments have
concentrated on their administrative-and operational successes, and on the researchers' skills in data analysis.
Although a final evaluation of the Gary, Seattle-Denver and Manitoba experiments would be premature,
since final reports have not been available, it appears that they shared some of the design and measurement
problems associated with the earlier projects. The significance of these problems should be apparent from
previous comments.
In summary, the range of estimates of work responses was not wide, but the variations could be of potential
significance to a national NIT program. More importantly, the problems associated with limited sample size,
non-random sample selection, poor measurement instruments and possible experimental bias imply that these
experiments' results cannot be treated with confidence, nor generalised to the entire U.S. population.
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TABLE 7.2: ESTIMATED PERCENTAGE REDUCTION IN WORK HOURS IN FOUR INCOME

MAINTENANCE EXPERIMENTS
Control/Experimental Differential as
Percentage of Control Mean*
New Jersey Rural Wage Gary Seattle-

(White) Earners Denver
Husbands 6 1 7 6
Wives 31 27 17 17
Total 13 13 8 9
Female Heads ** ** 2 12
* These estimates are weighted averages of the response in hours worked of different population groups.
Because of technical problems in estimating the response of black and Spanish-speaking groups in the
New Jersey experiment, the estimates reported here for New Jersey are for whites only. Recent re-
analysis of the New Jersey data provides evidence that the response of these groups is similar to that of
whites. Total response (and base hours) include only husbands and wives in Gary and Seattle-Denver;
in the other experiments they include other family members as well.
** None included in the experiment.
In their survey of social experimentation, Ferber and Hirsch (1978, p.1409) indicate two further reservations
that should be kept in mind in interpreting the experimental results. First was the restricted scope of the
experiments, both geographically and otherwise. Generally, the populations covered were limited sharply in
terms of eligibility. Second, labour supply response to an income maintenance program would need to be
interpreted with regard to the demand for labour at that time. One may well expect that labour supply
response to an income maintenance program will vary inversely with the tightness of the labour market, other
things being equal. The individual's ability to vary work hours is a related factor. The Gary results show that
in a highly institutionalised labour market, some may give up work entirely, partly because they cannot
marginally vary their hours of work. Labour supply responses should be assessed in relation to institutional
factors, and perhaps in relation to differing labour markets within a society.
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A number of more general comments can be made. Many of the experimental results are reported as changes
in hours worked by individuals - male family heads, female family heads, working wives or dependants. A
more comprehensive assessment of long term changes in the overall economic behaviour of the income unit
would be desirable in order to assess the impact of the introduction of a GMI. For instance, the decision for a
working wife to have children or to give up some hours of paid work in order to care for young children or
work in the home, the decision for a male family head to work or not work overtime or to take a second job,
the decision by a teenager to continue or to leave schooling, the decision by a spouse or a dependant to leave
an income unit may all be inter-related. It seems unwise to emphasise the findings of a three year experiment
(simply that husbands will reduce their work hours by as little as 1 to 7 per cent, and wives by as much as 17
to 31 per cent), as if this is what could be expected ten years after the introduction of a permanent GMI or as
if this was a good measure of the overall impact of a guaranteed income.* On the other hand, it may not be
realistic to think it is possible to measure comprehensively the total economic costs of a real social change, if
that in fact is what the introduction of GMI would represent. But on the questions of long term behaviour by
income units and decision-making within units, the experiments are, if anything, suggestive rather than
definitive. A further qualification should be noted. The finding of the Rural experiment that farm families
under-reported their income indicates that a GMI might provide incentives for mis-reporting of income rather
than incentives for labour supply reductions. The extension of income security to the working poor would
extend the opportunity for persons to receive or to increase their benefits by misrepresenting their income.
However, it is not possible to assess the significance of this problem on the basis of the experiments.
Despite the fact that the experimental results cannot be regarded as definitive, they were nearly all of
comparable size and in the theoretically expected direction. They also reflect the actual behaviour, for
whatever reasons, of thousands of people over a period of years. As Ferber and Hirsch (1978, p.1409) note,
"one of the pervasive findings is that ... people do not rush to accept a free hand-out". However, in judging
the significance of such a conclusion, it should be remembered that
* The 20 year module of the Seattle-Denver experiment may ultimately provide more information on the
long-term behaviour of income units, as may the Panel Study of Income Dynamics (see Institute for
Social Research, University of Michigan, Five Thousand American Families - Patterns of Economic
Progress, Volumes I-V, 1974-1977).
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the labour supply results meant different things to different people. As has already been noted, wives in the
New Jersey experiment reduced their hours of work by 31 per cent, but this proportion was high only because
the initial work involvement of these women was very low. In any case most of these working wives then
stayed at home to look after their children; whether such a reduction in labour supply is good or bad depends
on one's point of view. Similarly a negative income tax may induce teenagers to leave the workforce in order
to continue schooling or undergo training or it may increase family breakdown by giving women in
unsatisfactory marriages greater economic security if they were to leave their husbands. These examples
indicate that important social values may be in conflict - and that achieving one objective may be at a cost to
others. Evaluation of the labour supply results may also depend on one's perspective. As already quoted,
Lester Maddox thought that the Family Assistance Plan proposed by the Nixon Administration would mean
that it would be impossible to hire maids or janitors. Presumably, the conclusion that this would be a good or
a bad result would depend on whether the evaluator was an employer of janitors and maids or a janitor or
maid. Again, in the New Jersey experiment, the researchers noted that they considered family labour supply
reductions of 8 to 13 per cent to be low; others may simply consider those reductions to be large.
Interpretation of the figures may also reflect differing political attitudes. This can be seen in Martin
Anderson's Welfare - The Political Economy of Welfare Reform in the United States (1978). Anderson was
Ronald Reagan's social welfare adviser in the 1976 election, and is currently one of the new President's chief
domestic policy advisers. Anderson rejects so-called "radical" welfare reform programs, in part through an
analysis of the results of the New Jersey, Rural, Gary and Seattle-Denver experiments. He argues that the
experiments suffered a number of methodological difficulties that seriously biased them in the direction of
underestimating the reduction in work effort that would take place under a real, nationwide guaranteed
income plan.
The first of these was the Hawthorne effect - participants in the experiment may have developed a sense of
responsibility about their work behaviour, and hence not reduced their labour supply as much as they would
under a national scheme. The small size of the experimental samples also would create a downward bias, as
families would be isolated from others receiving NIT payments. A national program might raise group
awareness and encourage greater participation and reduced work. Anderson argues that the most serious
potential bias was the "windfall effect" - most participants in an experiment would regard their payments
simply as good luck, knowing that they will end in a few years, but under a permanent national program their
behaviour would alter
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permanently. A fourth bias could arise from the presence of welfare which would mask possible work
reductions. Further biases identified are the "truncation effect", the "non-random effect" and the "part-time
job effect", all of which lead to underestimates of work disincentives, and a weak "substitution effect" which
may lead to overestimates. These biases are then used by Anderson for estimates of the possible corrections
that should be made to the work reductions measured in the experiments, with an illustrative range of best,
average and worst cases. The average measured work reductions in the experiments for each category of
worker were adjusted and then projected to the national population simply by doubling.
On this basis the "actual" work reductions that should be expected are calculated by Anderson as between 22
per cent and 69 per cent for husbands, 35 per cent and 75 per cent for wives, 46 per cent and 75 per cent for
dependants, and 19 per cent and 71 per cent for female heads. These estimates are then weighted to reflect
the importance of each of these categories of workers in the U.S. labour force. The consequent estimates of
the total expected work reduction for the population under a guaranteed income are 29 per cent in the best
case, 51 per cent on average, and 72 per cent in the worst case.
A minimum 29 per cent reduction in the work effort of the population is a cogent argument against the
introduction of a NIT. However, with the exception of the "windfall effect" there is no empirical evidence
that would enable these biases to be quantified. Most of the so-called "effects" have uncertain implications or
are logically inconsistent with one another there seems no necessary reason why people should behave
"responsibly" in an experiment due to the Hawthorne effect and lose all constraints once a permanent
program is introduced; the "small-scale effect" implies that experimental families are isolated and unaware of
their rights, the "windfall effect" implies the opposite, a considerable knowledge of experimental conditions
among the treatment groups. There is no real argument why all these "effects" should be simply added
together. In effect, Anderson is taking qualifications that make it difficult to extrapolate from an experiment,
and claiming that this is what people will actually do under a real program. Finally, it can be questioned
whether such corrected estimates do not undermine the very findings on which they are said to be based.
Anderson is arguing that the experiments were successful in estimating labour supply effects, it is just that
the findings were between 300 and 1,000 per cent too low.
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Moreover, even as there was no general agreement on the interpretation of experimental results, there was no
prior consensus on the essence of the work incentives debate. For many politicians and for the public the
main concern was with the guarantee element of a GMI; for most of the researchers, and those closely
involved with welfare, the main concern was with the withdrawal rate. The first concern is that people won't
work if you give them money, the second that people won't work if you take too much money away from
them. Consideration of a guaranteed minimum income involved dealing with issues of work, of family
relationships and of entitlement to welfare. These further entail primary social activities and beliefs. In some
respects, concern in the U.S. with "welfare dependency" parallels concern in the U.K. with "scroungers" or
with "dole bludgers" in Australia. These concerns may involve the belief that there is a class or a number of
people who will take unfair advantage of social welfare provisions, or that social welfare provisions in
particular forms may establish incentives for people to behave in anti-social ways. There are inconsistencies
in these attitudes; for instance, to describe people as "scroungers" or "bludgers" is to label them as deviants,
different from you or me, but it also involves the recognition that their behaviour is rational, for this
implicitly recognises that work can be unpleasant, particularly for the poor, and that a reasonable person
could be expected to avoid it.
The work incentive experiments were involved in an area where a wide range of social values intersect. The
beliefs that people should work, that people should receive their due and that they should not suffer from
need are accompanied by equally complex values about family obligations, and about the reciprocal rights
and obligations of society and individuals. It would seem unlikely that even a series of social experiments is
going to resolve these issues.
In discussing the problems associated with social experimentation (in Section 1.4) it was noted that
experiments could be used as alternatives to action. The underlying concerns may have new expression by
the time an experiment is finalised, due to new economic constraints, changed beliefs or expediency. Events
overran the research questions of the negative income tax experiments. By 1967, expenditures on the
Vietnam war had begun to exercise constraints on anti-poverty programs. Well before the first experiment in
New Jersey was completed, a new President had embraced its principles and its hoped-for conclusions, to the
extent of deciding that a "Graduated Work Incentive" system could hardly be worse than "welfare". The slow
dying of President Nixon's "workfare" proposal - the Family Assistance Plan - testifies to the remarkable
level of disagreement possible over the political and redistributive impact of negative income tax.
121
The changing composition and interests of Administrations weakened the emphasis of anti-poverty programs.
The OEO was abolished in 1973 and its responsibilities were passed to HEW. Two miscalculations on the
first project resulted in that experiment being behind schedule and staying there. The experimenters
underestimated the difficulty of setting up an experiment in the field, and they did not anticipate that their
research would be directly relevant to a proposed social program - the Family Assistance Plan - in less than
two and a half years. Boeckmann (1976) has discussed the mixed reaction in Congress to the preliminary and
final results of the New Jersey experiment. Most participants in the Family Assistance Plan (FAP) debate
regarded the findings as inconclusive, biased by the interests of the researchers, or failing to deal with the
issues of political concern about FAP. Moynihan (1973b) has also documented the Congressional and
Administration reception of the preliminary New Jersey findings, noting that there was little interest in a
national program using the tax and guarantee rates examined by the researchers.
These may be inherent problems of the experimental approach to social policy analysis. Social experiments
take time to plan, implement and analyse. A large scale experiment taking many years and with considerable
expense may rightly justify itself with scientific rigour. But social experiments are not quiet scientific studies
undertaken in a carefully controlled laboratory context. They are large, noisy, fast moving, hectic and usually
public activities (Rivlin and Timpane, 1975, p.61). These difficulties may interact with the changing
emphasis of political parties, the turmoils of government:
"The pattern persists: the bright idea, the new agency, the White House swearing in of the first agency
head, the shaky beginning, the departure eighteen months later of the first head, replacement by his
deputy, the gradual slipping out of sight, a Budget Bureau re-organisation, a name change, a new head,
this time from the civil service, and slowly obscurity covers all" (Moynihan, 1973a, p.190).
Experimentation is a method of program planning and evaluation. E.B.Sheldon, a former President of the
U.S. Social Science Research Council, has noted that "experimentation is viewed as 'a cycle that begins with
problem analysis; proceeds through the planning of an intervention, its development, experimental trial and
evaluation and ends in either program implementation or in replanning the intervention'" (Riecken and
Boruch, 1974, p.x). This definition is notable for its abstraction and for the apparent suggestion that the
phases of social experimentation lead logically, painlessly and inexorably either to program implementation
or to replanning of the intervention. The work incentive experiments certainly have not led to the
introduction
122
of a NIT and 'replanning of the intervention' seems an inaccurate and over optimistic way of describing the
debate surrounding present U.S. anti-poverty strategies. The abstractness of this concept of experimentation
has also been contradicted by the experiences of the work incentive experiments. Their results were
influenced in varying degrees by many small contingencies - the simple overlooking of sample truncation by
income eligibility criteria, the unexpected introduction of a generous AFDC program in New Jersey, the
intrusions of welfare agencies checking overpayments, the accuracy of income reporting by different groups,
a recession in the aerospace industry in Seattle, heavy snow falls in Manitoba. There was also the larger
institutional environment determining the significance of the experimental findings and interacting with the
operation of the experiments on a continual basis. Indeed, the work incentive experiments may be considered
as something of an accident. They were the consequence of diverse trends - the greater economic prosperity
of the early Sixties, the renewed awareness of poverty, the political commitment of the "War on Poverty", an
agreement among social scientists on the desirability of a guaranteed minimum income, a growing interest in
the evaluation of social programs and a certain optimism about all these areas of social policy. The
experiments illustrate that it is a mistake to identify the idealised methods of social experimentation with the
actual processes of social change.
7.2 Possibilities for Social Welfare in Australia - A Guaranteed Income?
How relevant then are these results and experiences to Australia? Here, as in North America, there has been
considerable interest in anti-poverty proposals involving reform of the social security system through the
provision of some form of guaranteed minimum income. One of the first approaches to the consideration of
these matters was the National Conference conducted by the Australian Council of Social Service in 1964
dealing with "The National Income and Social Welfare". Further contributions to the debate were made by
Stubbs' The Hidden People (1966), the Australian Institute of Political Science Summ er School on Poverty
in Australia in 1969, and the 1970 report of Henderson, Harcourt and Harper People in Poverty: A
Melbourne Survey. In the 1970s interest in guaranteed income grew, and the 1975 Report of the Commission
of Inquiry into Poverty (Henderson Report) recommended the introduction of a social dividend (Australian
Government Commission of inquiry into Poverty, pp.6787). The Priorities Review Staff Report on
Possibilities for Social Welfare in Australia also recommended the introduction of a GMI, this time in the
form of a tax credit. Apart from these major Government inquiries, the introduction of a GMI has been
proposed by such organisations as the Australian Council
123
of Social Services (ACOSS, 1975), and has since been supported from a wide variety of sources.*
The work incentives issue has been an important part of this debate. Indeed, according to Lewis, "the work
ethic lies at the base of the Australian income security program. Inherent in the scheme has been the
philosophy that people should work to maintain themselves by their own labour, and most of the
contingencies provided for under the scheme are provided on the expectation that they preclude or inhibit a
person being employed" (1975, p.10). The Henderson Report accepted that the work test provisions of the
Social Services Act reflected current public opinion, but argued that its proposed GMI was unlikely to reduce
very much the amount of work people would be willing to do. Apart from the social pressures encouraging
work, the Report felt that this assessment was confirmed by the results of the U.S. experiments - "Even when
the income retention rate [i.e. the complement of the withdrawal rate] was as low as 30 per cent no reduction
of earnings was noticed - except under some circumstances for wives with children. Thus the provision of a
guarantee did not reduce the family man's effort to earn" (p.40).
* For further Australian discussion, see, for instance, Australian Journal of Social Issues, Volume 5,
No.2, July 1970, which is devoted to reviews of GMIs; Hersey, A., A Taste of Security: Research into a
Guaranteed Minimum Income as a Solution to Poverty in Australia, Sydney, Anglican Information
Office, May 1974; Edwards, M., "A Guaranteed Income Scheme: Implications for Women", in The
Australian Quarterly, June 1976, pp.74-80; Cuttance, P., "The Poverty Commission's Guaranteed
Minimum Income Proposal: Unresolved Issues", SAANZ Conference Paper, Melbourne, August 1976;
Manning, I. and Saunders, P., "On the Reform of Taxation and Social Security in Australia", in The
Australian Economic Review, First Quarter, 1978, pp.51-57; Pritchard, H. and Saunders, P., "Poverty
and Income Maintenance Policy in Australia - A Review Article", in The Economic Record, April
1978, pp.17-31; Tulloch, P., Poor Policies: Australian Income Security 1972-77, London, Croom Helm,
1979; The Australian Financial Review "The lordly virtues of negative taxes", AFR, February 6, 1980,
p.11; Sheehan, P., Crisis in Abundance, Ringwood, 1980; and, Institute of Public Affairs, "Should we
abolish the Department of Social Security?" in IPA Review, October-December 1980, pp.76-79.
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The Henderson Report also referred to evidence available from the Family Centre Project carried out by the
Brotherhood of St Laurence in Melbourne. Between 1973 and 1976, nearly 60 families were provided with
income supplements as well as a wide range of support services. Preliminary results available to the Poverty
Inquiry showed that there was no evidence of a retreat into laziness, but on the contrary, the support provided
encouraged some families to work more regularly. However, in the final analysis it was found that over the
period there was a significant decrease in the men's work effort (Liffman and Salmon, 1975, p.96), although
at the same time there was a general decline in the labour market, and many of those who decreased their
employment in the market increased their voluntary work on the Project itself. Liffman (1978, pp.149-150)
has argued that the project lends support to the view that people will work for reasons other than monetary
reward, and, in particular, will respond to work that is meaningful and challenging. The labour supply
findings of the Family Centre Project are not generalisable to the national population due to the small size
and unrepresentative nature of the sample and the absence of a control group. Moreover, it was not the
Project's intention to provide such evidence, but rather to explore innovative social work services.
The Priorities Review Staff Report on Possibilities for Social Welfare in Australia, in recommending the
introducton of a GMI, noted that "available evidence suggests that disincentive effects of cash assistance to
full-time workers is small. An experiment in the United States found that the number of hours worked by
primary wage earners was not significantly affected by income supplements" (1975, p.11). However, the
Priorities Review Staff Report on Assistance for Structural Adjustment, Income Maintenance etc. stated that
while no Australian evidence on the effects of benefit levels on work behaviour was available, "some
overseas experience suggests that such disincentive effects may be serious" (1975, p.15).
The picture is made more complicated by the Report of the Taxation Review Committee (1975), which noted
that high marginal tax rates may well have small effects on the work effort of the well-to-do, while "at the
lower income levels the consequences of medium and high marginal tax rates are much more mixed, and
very much more dependent on personal and job characteristics. Hence in general the Committee is doubtful
whether, within the kinds of limit that need to be considered seriously, changes in the progressivity of the tax
scale would have important effects upon work incentives" (pp.30-31). Yet in discussing social security and
the taxation system, the Report suggested: "the guaranteed income is paid irrespective of whether the
recipients have sought work and been unable to find it or are genuinely sick or disabled or have any other
valid reason for
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not earning their own livings. In the Committee's view, such schemes seem likely to have consequences for
incentives to work and save which make it impossible to consider them seriously" (p.180). It seems that the
Committee considered that the disincentive effects of high marginal tax rates are less significant than the
effects of actually guaranteeing people an income.
These conclusions were reached before the final reports of the New Jersey experiment were available and
those findings need to be qualified by the critical literature that has since been published and by the results of
the other experiments. As previously discussed, the experiments cannot be regarded as having settled the
work incentives debate.
Even if these U.S. results were regarded as conclusive, it is doubtful whether their estimates of income and
substitution effects, say, could be simply transferred and used in estimating the work disincentive effects of a
possible Australian GMI. The amount of labour supplied by a population will be related to a wide range of
factors, including social attitudes to work and leisure, consumption patterns and saving patterns, and the
availability of flexible working hours, as reflected in patterns of overtime and second jobs, and part-time
work. It is also significant that in the U.S. experiments work responses were not generally found to be
sensitive to the levels of the guarantee and the tax rate - labour supply responses varied systematically by
racial group and family status. The racial differences in the U.S. are hardly relevant to Australia. The
different responses by female sole parents, working wives and dependants may be more relevant, because of
the more substantial dimensions of the labour supply response of these groups and because of developments
in the labour force participation of women in Australia. Very detailed analysis would be required before
conclusions in this regard could be reached.
Perhaps the characteristics of the population eligible for GMI payments are more relevant than the
characteristics of the general population. Even so, it is likely that the American poor are significantly
different from the Australian poor. Much of the concern expressed in the "War on Poverty" was with black
sole parents. There is no strictly comparable group in Australia. Again, interest in negative income taxation
arose in part from a concern for the working poor. It is probable that the situation of low income workers in
Australia is very different to that of those in the U.S. For instance, the level of unionisation of the workforce
has been much higher in Australia; there is no U.S. institution comparable to the Conciliation and Arbitration
Commission, nor has the concept of the minimum wage been historically as important; rates of
unemployment have been very different, with Australia having
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low levels between the 1940s and the 1970s; and, there has been no U.S. social provision of universal
payments for families with children, while the Australian government paid maternity allowances between
1912 and 1978, and child endowment/family allowances since 1941. Such institutional differences suggest
that the concerns of the United States, or those of any other country, can hardly be transferred unchanged to
Australia.
In summary, labour supply responses in the U.S. were found to be sensitive to social factors, particularly
race. Given the different social environment, it is reasonable to expect that, faced with a guaranteed
minimum income, Australians would respond differently to Americans.
The U.S. experiments are of very limited usefulness when analysing the work incentive effects of current
welfare payments or the personal income tax system. In general, the experiments did not distinguish labour
supply responses to the income guarantee from responses to the withdrawal rate. Only for working, female
sole parents in Seattle-Denver was there some indication that increases in the withdrawal rate had stronger
negative effects on work effort than did increases in the level of the basic guarantee. This suggests that
attention should be focused more on the operation of income tests, rather than the simple provision of welfare
payments. But it is not possible to take this rather tentative conclusion about the effects of a NIT on certain
American women, and assert with any confidence that it is relevant to the effects of Australian pensions and
benefits. The effects of the personal income tax system have recently been discussed in Australia, with
proposals for replacement of progressive tax rates by a flat rate of tax. Just as studies of the disincentive
effects of the U.K. tax system in the 1940s and 1950s were of little relevance to welfare reform in the U.S. in
the 1960s, the income maintenance experiments are of little relevance to proposals to change the Australian
income tax system in the 1980s. But, the earlier conclusion should be reiterated - the U.S. experiments gave
no indication of massive work reductions. The introduction of a GMI, within their broad parameters, should
not be expected to herald social and economic collapse.
Should Australia develop a guaranteed minimum income scheme? It should be emphasised that GM1s
proposed in Australia and overseas have generally been conceived of as radical alternatives to existing
income security programs. In this sense, the guaranteed income has usually been seen as involving the
integration of the taxation and income security systems to entirely replace current income maintenance
provisions. Payments would be made to all income units, on the basis of economic need alone.
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In recommending its GMI, the Henderson Report noted that "it would be unwise to make suggestions without
a lively appreciation of the strengths of the existing provisions. By and large they provide for a transfer of
income from those who have enough to those who otherwise would have very little, with very few
extraneous flows of funds. The system is remarkably free of the insurance complications which encourage
such extraneous flows elsewhere. It covers nearly all people who are at risk of poverty and, while its basic
rate of pension may not be as high as it should, the income retention rates allowed are for the most part as
generous as any overseas" (1975, p.67). The Report made a number of suggestions for improving the existing
system - extending assistance to additional categories of people, making additional payments for special
contingencies, improving the fairness of income tests and increasing the level of payments. It was argued,
however, that even after such changes were made the system would retain a number of inherent drawbacks -
the continuing prominence of disability categories and continuing divided administration. The Report noted
that the income security system gives favoured treatment to categories such as the aged, invalids, widows,
sole parents and the unemployed, and this may be inequitable to people whose financial situation is similar to
those in such groups, but who may just fail to satisfy the eligibility requirements. This may produce
incentives to gain that disability. The current system also retains separate administrations for taxation and
social security, as well as other income-tested benefits such as education allowances. The coordination of
these activities would assist in the avoidance of poverty traps, provide more equitable treatment of
fluctuating incomes and improve take up of pensions and benefits. Finally, such an integrated system would
end the segregation of the poor from the rest of society. Income security would no longer be a charity, there
would no longer be a hierarchy of deserving and undeserving poor - " Just as those with high private incomes
are required to yield of their riches and pay income tax, so those with low private incomes would receive
social security benefits in alleviation of their poverty, in order that all might live as members of the one
nation" (p.36).
The Priorities Review Staff suggested that there were a number of similar advantages to their proposed tax
credit. The Report argued that "in simplifying the welfare system, such a scheme would ensure that most of
the needy would get help. To the extent that it incorporated existing means-tested benefits, a minimum
income scheme integrated with the personal income tax system would avoid sharp jumps in the effective tax
rate sometimes faced by welfare recipients .... the scheme outlined ... greatly reduces the penalty suffered by
those who fail to meet necessarily arbitrary criteria of eligibility or miss out through ignorance of some
specific benefit" (1975, pp.20-21).
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The reasons advanced for the introduction of a GMI in Australia are similar to those proposed in the United
States and Canada. Yet the income security systems of each country are very different and it is likely that the
problems associated with each current system are also different. In the United States and Canada a GMI was
seen as solving the equity problems associated with the large variations in benefit levels from State to State
and Province to Province and the variations in benefit levels arising from the distinction made between social
insurance and public assistance programs. These problems are less relevant in Australia. One common
advantage claimed for GMIs is that assistance would be provided on a non-categorical basis, and, in
particular, assistance would be extended to the working poor.
However, the problems associated with categorisation of welfare recipients are generally greater under social
insurance schemes where eligibility for assistance is derived from past contributions. In the United States,
new entrants to the workforce, such as school leavers, who have had no opportunity to contribute to any
social insurance schemes may be ineligible to receive unemployment benefits. As well, unlike the Australian
income security system, in these systems the period for which unemployment benefits can be paid is limited.
The U.S. income security system is also different from those of Canada and Australia, and many other
countries, in not providing universal cash payments in respect of children. Payments such as Family
Allowances already provide some assistance to the working poor, albeit those with children. An assessment
of the comparative advantages of a GMI over varying income security systems would also need to take
account of a wide range of other factors, such as the general level of wages in the community, the character
of minimum wage and wage fixation provisions, the level of unemployment, the labour force participation of
family members apart from the working head, the progressivity of the tax structure, and conditions of
employment, such as sick leave. It seems inappropriate to transfer the concerns of one society to another or to
assert that the advantages of any one income security alternative, be it a negative income tax, a social
insurance scheme or a flat rate, income-tested system, are equally relevant in different social conditions.
In some respects, Australia is already very close to having a guaranteed minimum income scheme. According
to Patricia Tulloch, "Since the 'Old Age and Invalid Pensions Act' (1908) some sections of the community in
Australia have been 'guaranteed' a minimum income; and, seen in this sense, the idea of a guaranteed
minimum becomes synonymous with federal income security programmes" (1977, p.348). In 1979, the then
Minister for Social Security, Senator Guilfoyle argued that "Australia has possibly come closer than any
other country to introducing a guaranteed minimum income: practically all - other than those
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who are able but choose not to work - are guaranteed an income. The non-contributory, flat rate nature of our
system provides comparatively high benefits to many of the poorer groups who tend to be excluded from
social insurance schemes overseas, including those who do not have a consistent work record, certain
categories of sole parents, and those without long term residence in the country" (p.1). It can therefore be
argued that a guaranteed income, conceived of as a radical alternative to existing income security programs,
offers fewer advantages in Australia than it does overseas.
Moreover, the advantages claimed for the GMI approach are not necessarily the result of the "radical"
elements of that form of income support. In comparing current income security arrangements with proposals
for reform, it is important to distinguish "pure" forms of guaranteed minimum income from "mixed" forms.
Under a "pure" GMI all persons would be eligible for payments which would be made on the basis of income
alone. That is, persons would not be eligible on the basis of age, invalidity or unemployment, but simply on
the basis of low income, irrespective of the cause of that low income. In practice, "pure" GMIs have not often
been recommended. The Commission of Inquiry into Poverty, for instance, proposed that its GMI would
provide different levels of assistance for categorical and non-categorical income units, in recognition that
those with disabilities arising from invalidity, age or sole parenthood, say, are comparatively disadvantaged.
There would also be particular problems in Australia in introducing a "pure" negative income tax of the form
described in Figure 2 on Page 15. A NIT with a guarantee approaching current levels of pension and benefit
could not be imposed over the current income tax structure, unless the withdrawal rate was well in excess of
50 per cent. A NIT with a withdrawal rate of 50 per cent or less would provide positive assistance to some
families whose private income was in excess of average weekly earnings, and in order to insure that
disposable income rose no less progressively as private income rose, it would be necessary to provide further
tax reductions on extremely high incomes. Therefore, if it was desired that the NIT should have relatively
low withdrawal rates, it would be necessary to make extensive changes to the income tax system. For such
reasons, both the Henderson Report and the Priorities Review Staff Report recommended a flat rate of
income tax in conjunction with their GMIs.
Once criteria other than income alone are introduced a GMI will become "mixed". What is distinctive then
about any "pure" form of GMI is the basis on which payments are made - assistance is provided as a right not
because of some form of disability or disadvantage. Therefore, to assess the essential differences
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between income security alternatives, it is necessary to make value judgements about the philosophical basis
of income security. Differences between GMIs in the level of payments, the rate of withdrawal, the eligibility
criteria applied or the degree of integration with the taxation system are design features. They may partially
reflect, but are not the necessary consequence of, different evaluations of the purpose of income security. For
instance, currently Special Benefit assists some of those people who fall outside the eligibility categories for
other pensions or benefits. With greater coordination of administration between Departments it may be
possible to have a system of income security that serves the same functions as those the Henderson Report
endorsed for its GMI, but based on an exhaustive set of disability categories rather than universal entitlement.
Indeed, the concept of universal entitlement can mean different things to different people. The notions of
"directing assistance to those most in need" and "making payments on the basis of need alone" contain
elements of concern with both adequacy and efficiency, with generosity and restrictiveness. This potential
ambiguity may partially explain the breadth of support for the introduction of a GMI; why, for instance, in
the U.S. a GMI was proposed by figures as diverse as Milton Friedman and Senator McGovern.
These comments do not lessen the force of criticisms made of current income security arrangements
(although there have been very significant changes in income security since the Henderson Report in 1975*)
nor do they lessen the importance of proposals to simplify the administration of income security and improve
the coordination of social programs. However, when considering a GMI as an alternative to existing
programs, it can be argued that the same results may be achieved by different means. The question whether a
GMI should be introduced in Australia is ultimately only answerable in terms of individual judgements. Such
judgements are fundamental to income security policies, for "need", like "work incentives" or "standard of
living" is a concept, and is not directly observable in itself. But the
* For instance, Supporting Mothers' Benefit was extended to sole fathers, becoming Supporting Parents'
Benefit, automatic indexation of most basic pensions and benefits 'has been introduced, Family
Allowances were introduced in place of tax rebates for children and child endowment, the means test
has been converted to an income test, the income tax scale was simplified, pensions and benefits have
been extended to patients in mental hospitals, the six months waiting period for Supporting Parents'
Benefit has been removed and social security appeals procedures have been widened.
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concepts refer to social conditions and human behaviour that is observable and real. Each of these social facts
can be studied - a researcher can carry out a work incentives experiment, attempt to establish a poverty line
or estimate equivalence scales. There may be no ultimately right answers, but there can be more or less
information and better or worse methods of inquiry. Yet even after these "facts" have been determined,
judgements will intervene. Any income security policy must implicitly embody or explicitly express values
about "need". Judgements of needs, of rights and obligations are not technical questions subject to technical
resolution. People will answer in terms of the priority they give each consideration or the balance between
objectives they wish to achieve.
7.3 Social Experimentation and Public Policy - Asking Policy Questions
Finally, despite previous comments about the difficulties of answering policy questions, it has been
suggested that the income maintenance experiments provided a valuable range of administrative lessons and
improved policy makers' and researchers' understanding. Would there be any value in carrying out a large
scale social experiment in Australia? There almost was such an Australian experiment. Work on the design of
the Housing Allowance Experiment (HAE) commenced within the then Department of Environment,
Housing and Community Development (EHCD) in April 1976 and continued until June 1978, when a
government decision was taken not to proceed some months before the enrolment program was to be started.
The main purpose of the experiment was to investigate various means for helping low income renters to
improve their housing through the private market, and to relieve excessive rent burdens. HAE was to be
conducted over three years in two sites, Melbourne and certain areas of Tasmania, and was to involve a total
of 3,750 sample households.
HAE, had it proceeded, may well have provided a lesson on the appropriateness of large scale
experimentation to Australian social policy. As well, it was claimed that for the first time in Australia there
would have been collected an extensive body of longitudinal data useful for an assessment of housing
allowances, for understanding and analysis of housing markets, or evaluation and development of other
income maintenance or welfare programs. Information was to be collected to permit analysis of, among other
things, work disincentive effects, changes in household formation, employment history, income history,
expenditure profiles, rental prices, dwelling quality and take-up of benefits. For purposes of measuring
behavioural parameters, the analysis would have related this information to data on household characteristics,
the subsidy and withdrawal rates applied, and the size of payments received. However, as
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only rent was to be partially subsidised, most families would have received fairly small payments and these
may not have had a significant effect on, say, labour supply behaviour or family formation.
The proposed design features of HAE appear broadly similar to those of the income maintenance
experiments. The Consolidated Papers of the Housing Allowance Experiment (Volumes 1 and 2, EHCD,
1978) provide details of the definitions of the family, family income and the accounting period, the payment
and interviewing procedures and sample selection. These papers are illuminating since they illustrate the
general issues of social experimentation with a level of detail that is not available from published U.S. or
Canadian sources.
Given the generally negative tenor of previous comments, then why experiment? In Systematic Thinking for
Social Action, (1971, pp.118-119) Alice Rivlin answers:
"On balance, I believe the advantages of social experimentation far outweigh the disadvantages, and
that the federal government should follow a systematic experimentation strategy in seeking to improve
the effectiveness of social action programs. The process will not be easy or quick or cheap. No one can
look forward to an end to it. It would be a mistake to adopt experimentation in the hope that it would
'tell us what works'. The phrase suggests that there is some all-time optimum way of organising social
services and that we are going to find it and then quit. Clearly the world is not like this. What works for
one place or one generation will not work for another. The process of developing new methods, trying
them out, modifying them, trying again, will have to be continuous. But unless we begin searching for
improvements and experimenting with them in a systematic way, it is hard to see how we will make
much progress in increasing the effectiveness of our social services."
In this sense, the argument for systematic experimentation is straightforward. Information necessary to
improve the effectiveness of social services may be impossible to obtain in any other way. In the absence of
deliberate experimentation, new methods of carrying out social programs are implemented only sporadically
or under particular conditions that can substantially influence their apparent success. New methods must be
tried out systematically under a variety of conditions if their effectiveness is to be evaluated accurately.
Similarly, it is often impossible to predict how individuals will behave in the face of a novel pattern of
incentives. To start up a major national program that affected incentives to work or to increase productivity
and to discover that the incentives did
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not operate in the expected direction might prove very costly. Common sense suggests trying the program on
a small scale to gain advance knowledge about effects on incentives (Rivlin, 1971, p.108).
Rivlin's view that social experimentation will not provide the "all-time optimum way of organising social
services" is convincing, and is certainly supported by the argument in this paper that the income maintenance
experiments did not, and could not, settle once and for all the work incentives debate. The failure of the
experiments to provide such conclusive evidence does not mean that they were valueless. The experiments
did produce useful evidence about individual work behaviour, advanced economic theory in the area,
provided many lessons on the administration of a negative income tax, improved policy makers' and
researchers' understanding of a wide range of issues, and contributed to social research and statistical
analysis. In retrospect, these contributions may justify a social experiment. They at least suggest that to
characterise an experiment as either a success or a failure is inappropriate. A 100 per cent failure would be a
dismal experiment indeed, and a 100 per cent success merely requires an unlimited budget, lots of time, and
prior knowledge of almost everything that might be learned from the experiment (Watts and Bawden, 1978,
p.67).
It is possible that large scale, expensive social experiments may best be justified in terms of benefits related
to issues that are not central to the proposed experiment. For instance, if HAE had been able to provide a
longitudinal data base on low income families then its contribution to social policies could have been
considerable. It is not accurate to describe such benefits as peripheral, but in general it does seem preferable
not to over-emphasise a single research issue on which the success or failure of an experiment will depend.
Anyone interested in the formation of social policy may learn something from the experiences of the income
maintenance experiments in the United States. Many issues relating to the administration of a negative
income tax, or the administration of any income security program, were illustrated. These lessons in regard to
accounting procedures, definition of the family and family income could be drawn out into an entirely
different paper. The lessons for experimental design - both negative and positive - were similarly wide
ranging and have undoubtedly contributed to the future design of any large scale social experiment. It is in
the area of policy formation that the lessons of the income maintenance experiments are most ambivalent. It
has been argued that, due to the nature of policy itself, they only made a limited contribution to the issues of
work incentives and the usefulness of a guaranteed minimum income. Welfare reform advanced in the
direction of the GMI
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quite independently of the experiments themselves. Welfare reform in the U.S. has since headed in other
directions, although the concerns that prompted the experiments are still important.
However, the more general concern that underlay the experiments is unchanged. How can government make
decisions in a more rational way? "To care about this question one has to have faith in the ability of nations
to solve at least some of their problems by collective action. One also has to have sufficient faith in
rationality to believe that analysis of a problem generally leads to a better decision" (Rivlin, 1971, p.1). This
may be the modest promise of social experimentation - not as a way of answering questions, but as a rational
way of asking them. Conclusions will always be debatable, but if the questions have been asked in the best
possible form, then public policy - collective social action - is more likely to advance in appropriate ways.
An overall assessment of the work incentive experiments might conclude with the observation that their most
significant contribution has been as examples of what can and cannot be learned from social experimentation.
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APPENDIX ONE
ADMINISTRATIVE FEATURES OF THE EXPERIMENTS
The main administrative features of the work incentive experiments were the interviewing and transfer
payment processes.
Interviewing: In New Jersey, interviews administered every three months provided ed the main source of
data for the experiment. Each interview was approximately one hour long and consisted of two parts:
(i) a section, which was repeated each time, covering labour force status and participation of all
family members 16 years and older; and,
(ii) a section, which varied every interview, covering at differing frequencies other kinds of
economic behaviour and information on health and social behaviour.
In addition to the quarterly interviews there were also eight one-off interviews, including the interviews to
establish eligibility and base line data and a follow-up interview three months after the last transfer payment.
In the other U.S. experiments, the interviewing procedure seems to have been similar, except in Gary and
Seattle-Denver where the interviews were every four months instead of quarterly. In Mincome Manitoba,
experimental and control families were interviewed every four months and the interview instruments
collected an average of 500 pieces of information for each family on such matters as types of employment,
hours of work, wage rates, job search, education, non-labour income, net worth and participants' attitudes and
perceptions about their lives and jobs and their involvement in the community. The information was recorded
on a continuous basis and was claimed to provide a fairly comprehensive picture of participants' lives during
the period of the experiment.
One of the general issues about which the researchers were sensitive was the problem of the Hawthorne
effect, which could be enhanced through the interviewing process or other contacts. In the beginning of the
Seattle-Denver experiment, for instance, it was noted:
"If, for example, families on the income maintenance experiment develop a sense of 'experimental
responsibility' they may behave quite differently than a control group without such a sense of
responsibility. We will attempt in the experiment not to communicate to the experimental group the
nature of the dependent variables to be studied. In this way, their sense of experimental responsibility
cannot be translated into an action directly relevant to the variables being measured" (Kurz and
Spiegelman, 1971, p.27).
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How successful this strategy was is not recorded.
Payments: In the U.S. experiments, each experimental family filled out an income report form every four
weeks or monthly, at the recipient's option. Families were asked to report such information as changes of
address, family size changes, wage income of every family member over 15 years of age, transfer and
property income by source, and certain deductible expenses such as income taxes, child care, maintenance
and medical expenditures, item by item. Payments were based on income and family size as reported in these
returns. All households were paid fortnightly, or semi-monthly if they filed monthly, with married heads
receiving one cheque made payable to the husband and wife jointly.
Payments were based on the following general formula -
P = G (r.y)
52
Where P = weekly negative tax grant

G = yearly dollar guarantee based on plan assignment and family size
r = withdrawal rate
y = average weekly income calculated on the basis of either the three month or twelve month
accounting period depending on which accounting system the family had been assigned.
In addition to the negative income tax transfer payments, the families usually received a small fortnightly
payment (included in their cheques) in return for mailing in the income report form. There were also small
payments to the control families for returning a card giving their current address, and small payments for
both groups for each interview.
In Mincome Manitoba, payments to families were based on the following formula -
P = Sj - tY - rW - T
where P = payment to the family

Sj = the support level for families of size j
t = the tax offset rate
Y = family income
r = the net worth tax rate
W = family net worth (assets minus liabilities)
T = competing transfers and taxes.
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The payments system used in the U.S. experiments thus was expanded to include consideration of family
wealth and the integration of the NIT with other transfer and tax programs. Within a static framework, it was
considered that horizontal equity required NIT payments to be adjusted to reflect both income flows and the
stock of wealth. A family's net worth was seen to affect ability to generate income in kind and ability to
consume wealth directly. In a dynamic context, wealthconditioned reductions in payments implied a tax on
wealth which could affect savings/consumption decisions. Given time and cost constraints on the experiment,
net worth parameters were not experimental variables in the design, but were chosen on the basis of
subjective judgements of their policy relevance. The following treatment of personal net worth was adopted.
Owneroccupied dwellings were exempted from inclusion in net worth. An additional basic exemption of
$3,000 was applied to each family, and the first $10,000 of net worth beyond this exemption was taxed at 4
per cent, the tax reducing the NIT payment dollar for dollar. The implicit assumption was that people in this
situation were not expected to consume their wealth, nor to save or add to their wealth while on the program.
The next $20,000 of net worth (up to the $33,000 level) was taxed at 8 per cent, while net worth in excess of
this was taxed at 16 per cent. Relatively wealthy NIT recipients were expected to be consuming their assets
to help maintain themselves during any periods when their incomes were low. Integration of NIT payments
with other tax and cash transfer programs was necessary to ensure that all participants under a particular
treatment were effectively receiving the same support level and tax rate. The experimental program taxed all
other government cash transfers at 100 per cent and rebated all income-conditioned taxes, including positive
income tax.
In Mincome Manitoba, families were required every month to file an income report form which identified the
total income received by all members of the family from all sources. Net worth was reported at the beginning
of each calendar year, with significant changes declared as they occurred. Payments were made monthly.
Apart from consideration of net worth and other tax and transfer payments, an adjustment was made to
ensure annual equity reported income above the break-even level in any month was carried forward and
counted as income in later periods when income fell below break-even. It was considered essential to collect
information on the possible effects of filing detailed income report forms (IRF), the accuracy of different
reporting systems, and the feasibility of different methods of payment. one half of all control families were
designated as IRF controls and submitted a monthly IRF in return for an incentive payment. The remainder
were postcard controls and for a smaller payment simply sent a postcard containing updated family
information. Recipients were also given the choice of receiving their payments by mail or by direct deposit to
their bank accounts. In the Dauphin saturation sample, a prospective reporting procedure was used in
addition to the normal retrospective method, to generate information on the reliability of income predictions
by families.
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APPENDIX TWO
RULES OF OPERATION
Kurz and Spiegelman (1971, p.27) have noted that concepts such as income, wage rate and hours worked
subsume very complex measurement issues. Measurement difficulties occupy much of econometric research
and accurate measurement is vital in social experimentation. Problems in defining "the family" or "family
income" may lead to specific questions, e.g. should income from property be taxed as unearned income or be
considered as earned income, the results of past labour? To resolve such issues, rules of operation were
devised for each experiment to incorporate many individual decisions regarding definitions of the family,
income and the accounting period.
Definition of the family: In the New Jersey experiment, the family was defined as a household head plus
his or her dependants. A dependant was defined as any blood or adopted relative living with the head, or a
person not so related but living with the head and receiving no more than $30 per month from income
sources outside the family income. Children leaving the family could take their marginal payments with them
but could not start new experimental units of their own. Similarly, families could admit no new members for
payment purposes except newly born children, or other children after a six month continuous period of
residence. When a spouse left the original household, he or she could take their portion of the family
guarantee but could not form any new family units eligible for experimental payments. The guarantees for
both spouses were equal and the children's guarantees went to the spouse who took custody.
In the Rural experiment, the treatment of families was somewhat different. Each family unit in a household
was eligible to receive its own income maintenance payment. A family unit was defined as any single person
21 years of age or older, or a married person 18 years of age or older, his spouse and their dependants. The
family unit containing the "head of household", who was the person responsible for the household's shelter,
received a slightly higher guarantee level than did other family units. If one of these other family units left
the original household, that person became eligible for the full "head of household" guarantee level. A family
head or spouse who left the original unit was eligible for a payment of one half the amount that a head and
spouse were entitled to when living together, but after one year of separation each was entitled to a full "head
of household" payment.
There is no information available on the definition of the family in the Gary experiment, SIME-DIME or
Mincome Manitoba.
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Definition of income: The definition of income in the U.S. experiments generally followed that of the
Internal Revenue Service (IRS). In New Jersey the earnings of all family members were counted as income,
as were rent payments received, net business income, interest and dividends, annuities and pensions, awards
and prizes, unemployment insurance, workers compensation and social security benefits, veterans' benefits,
strike benefits, training stipends and court ordered support payments. Income was also imputed for owner-
occupied and subsidised housing.
The United States Internal Revenue Service agreed to exclude experimental payments from taxable income,
although all other payments were considered taxable. As well, in order to avoid problems associated with
"stacking" of the experimental tax (benefit reduction) rate and the positive income tax rate, it was decided
that experimental families would be reimbursed in full or in part for positive taxes paid. This was done so as.
to maintain a constant tax rate relative to the plan to which families were assigned, up to the tax break-even
point when positive taxes would begin to be paid if the positive tax was based on the same tax rate as the
experimental plan. As in the example given in Figure 2 in Part 1.2, families paying no positive tax were not
affected, families with incomes below the break-even point of the experimental plan and paying income taxes
had all their tax reimbursed, and families with incomes over the break-even point of the experimental plan
but not as high as their "tax break-even point" were partially reimbursed. Allowable deductions in respect of
income included room and board receipts up to $12 per week, full support costs of children and other
dependants outside the home, and expenses incurred in order to enable a member of the household to enter
the labour force.
The experiments had major features in common. For example, in all the experiments, income taxes were fully
reimbursed. This was essential to ensure that the experimental tax rates were the effective rates faced by
families. However, there were some significant features of the treatment of income that varied from
experiment to experiment. In the Rural experiment, for those with assets, 10 per cent of net capital wealth
was added annually to income to represent potential capital consumption. Net capital wealth for this purpose
excluded the first $20,000 of business assets, the first $10,000 of equity in owner-occupied homes, $1,000 in
cash or savings, and all personal effects. In Gary the imputed value of capital assets was ignored, as was any
difference between actual rent paid in public housing and market prices. Short run capital gains were treated
as unearned income, but long run gains were excluded if they were entirely reinvested within six months of
sale.
140
The major difference between the experiments was in the treatment of welfare payments. In New Jersey,
welfare payments for families with dependent children were originally treated in the same way as other cash
transfers such as social security benefits. Because of the problems arising from the untimely introduction of a
generous AFDC-UP program (described in Section 2.4), the definition of income was changed and families
had to decide every payment period whether to accept welfare or experimental payments. Families who
chose welfare were excluded from the experiment. In the Rural experiment it appears that the treatment was
the same, but in SIME-DIME receipt of public assistance or any other need-conditioned payment from a
State, county or private agency exempt from tax was treated as a complete bar to any payments above the
filing fee. In Seattle-Denver, moreover, unemployment insurance, social security and other transfers were
taxed at 100 per cent. In contrast, in Gary, welfare or public assistance payments were not a bar to
participation. If the family had previously been on AFDC then experimental payments were made and the
experiment was reimbursed by AFDC funds. All other kinds of welfare counted as taxable income. There is
no information on the definition of income used in Mincome Manitoba.
The accounting period: The accounting period, the time period during which income received by a
family is included in the calculation of its payment, affects the degree to which equity is maintained among
families, i.e. the extent to which families with the same annual income are treated equally, regardless of the
different patterns in which their income is received. The New Jersey experiment was concerned with testing
possible work incentive differences induced by various accounting systems and therefore it was decided to
test the following two systems:-
(i) a twelve month moving average system, automatically achieving annual equity, and in which
the income for the current month was averaged with the income for the preceding eleven
months to reach an average income figure upon which each month's payment was based;
(ii) a three month moving average system in which income for the current month was averaged
with the income for the previous two months to reach an average figure upon which each
month's payment was based. With this system it was necessary in order to achieve annual equity
to institute a "carry over method" under which payments were based not only on the average
income of the last three months but also on any income in excess of the break-even amount
earned in any of the preceding twelve months. This excess income was carried over until it had
been dissipated, or for a maximum of twelve months.
141
A small subsample of 65 families was used to test the first system. This number proved too small to provide
any information on differences in work incentives, and in the final analysis of the New Jersey experiment the
65 families were included in the balance of the sample.
In the Rural experiment, families were assigned either to (i) a three month moving average system (or
alternatively a 12 weekly system, depending on their arrangements for submitting income statements), or (ii)
a one month or four weekly moving average system for a subsample of 75 families. The experiment also
contained a carry over provision necessitated by the uneven flow of income of farmers and the self
employed. There is no available information on the accounting period in the Seattle-Denver experiment. In
Mincome Manitoba the accounting period used was one calendar year. At the end of the year, the actual
payments received by a family over the accounting period were reconciled with the amount to which it was
entitled, based upon total icome received over the year. The resulting underpayments to families were
corrected and any substantial overpayments recovered. In Gary, the accounting period originally was to be
used as an additional treatment variable, but it was decided during the design phase that instead in a majority
of cases a single accounting period of four weeks would be used. Six to ten cases were to be randomly
selected from each of the treatment cells in Model City, with three or five cases from the non-Model City
treatment cells, and were to be given a separate accounting period of 12 weeks. By selecting a small number
of subjects from each treatment group for participation under the alternative accounting period, it was felt
that comparisons could be made in order to test the null hypothesis of no differences between accounting
period groups. This decision was made in 1971 just before the experiment actually started and there is no
information available on whether it was actually carried out.
142
APPENDIX THREE
ANALYSIS OF DATA
In discussing the analysis of tabour supply response in the New Jersey experiment, Rossi and Lyall (1976,
pp. 97-98) note that "a degree of professional anarchy prevails ... manifested in a tendency for authors to pick
and choose among data series and to construct new variables in ways that may vary from author to author".
This comment can be applied to the reporting of data analysis in all the experiments. Nevertheless a general
approach can be detected.
The principal aim was to estimate tabour supply response. Response or dependent variables were analysed in
relation to two other types of variables - treatment variables and control variables.
Dependent variables: Four main measures of Labour supply were used - labour force participation rates,
employment rates, total hours of work (including that of those not at work), and total earnings. These
measures are in increasing order of comprehensiveness, with earnings reflecting variations in all three
preceding variables and also variations in earnings per hour worked. Thus earnings would seem to be the best
summary measure of the effects on labour supply. However, because of possible bias in this variable the
hours measure was generally regarded as the most appropriate single measure of tabour supply. Bias in the
earnings measure may have arisen because experimental families filled out an income reporting form every
four weeks. They may therefore have learned more quickly than the control families, who did not have to
complete the forms, that what was to be furnished was gross rather than net earnings. It was thought in the
New Jersey experiment that this differential learning process may have caused a spurious differential in
earnings in favour of experimental families, particularly during the early part of the experiment. The
employment measure included changes in unemployment, which must be considered as a supply
phenomenon in the context of differences between experimentals and controls. That is not to say that
unemployment is voluntary, but if differential levels of unemployment appear between the control and
experimental groups, such differences should be regarded as a component of response whether or not that
component is the result of conscious voluntary choices.
In the Rural experiment, the income and work responses for wage earners that were measured as dependent
variables included total income (excluding public assistance and experimental transfers), wage income, hours
worked for wages, and employment status (or number of earners). For farm operators, the principal measure
of income analysed was farm profit, defined as gross revenue less current operating expenses. This definition
of profit included gross return to fixed factors of production (land and capital), as well as to the operator's
own labour. Dependent variables for farm operators also included several measures of tabour supply - for
husbands, these were hours of farm work and
143
hours of wage work, employment rate in wage work, and total hours of work; for wives, hours of wage work
and employment rate in wage work; and, for operators and wives together, total hours of work.
Control variables: In estimating labour supply, a large set of variables was typically used in the analysis
to control for differences between the experimental and control groups. Such differences could arise either
because a stratified random sampling procedure was used or because systematic differences may have
survived the randomisation procedure. Control variables were entered into labour supply equations in their
own right and they were also often combined with variables representing experimental treatments in order to
ascertain whether the treatments had differential effects on different subgroups of the treated populations.
Some of the important control variables used in the experiments were pre-enrolment value of the dependent
variables, ethnicity, education and potential earned income. In addition, there were specific control variables
appropriate to different experiments - for instance, AFDC status in Gary.
Treatment variables: The experimental treatments consisted of giving families cash payments. The
treatment variables therefore were the different payment plans - eight in New Jersey, five in the Rural
experiment, four in Gary, twelve in Seattle-Denver and seven in Mincome Manitoba. For each of these there
were variations in payments by family size. In general, two different methods of introducing treatment effects
were used. The first was to include a dummy variable for any experimental treatment and two additional sets
of variables that specified tax rates and guarantee levels. The second method used the experimental dummy
and a variable measuring average payment levels. However, in the final analysis of all the experiments it was
not possible to distinguish responses according to experimental treatments.
Methods of analysis: In order to sort out the varying results reported in the body of this paper it is useful to
consider the labour supply issue as one of estimating a response surface for each of the subgroups of interest,
where response is measured by the dependent variables. In general, two methods of reporting results were
adopted : simple tabulations of mean controlexperimental differentials by demographic and ethnic subgroups
and net regression coefficients with relevant statistical significance tests.
The findings reported in this paper have usually, but not always, been the mean control-experimental
differentials. The reported differentials in each measure of labour supply were the experimental treatment
group's mean minus the control group mean, as measured in a regression equation. Regression techniques
were used to control for important socio-demographic variables, so that the findings could be interpreted as
applicable to control and treatment groups with identical composition in terms
144
of these variables, i.e. the control variables discussed above. The general formulation adopted for the labour
response regression consisted of a control function (containing a variety of demographic, ethnic, and normal
income variables) and a response function (containing the experimental parameters). The former function
picked up variations in labour supply resulting from influences common to both experimentals and controls,
and the latter function was intended to pick up variations traceable only to experimental treatment differences
between the two groups. The model is
Y = f(C) + LR(X, XC) + u
where Y is the labour supply response in question, C is the control function, LR is the experimental response
(a function of the experimental parameters, X, and any interaction, XC), and u is a random error term. When
added together these functions provided a flexible way to estimate a response surface subject to a large
number of control factors. In interpreting the empirical results the researchers were interested in both the
height of the surface (i.e. the absolute control-experimental differences) and the slopes (derivatives) between
plans. The first would give an idea of the gross magnitude of the experimental impact on work, and the
second would provide estimates of the direction and sensitivity of work adjustments to specific features of
the program - the income and substitution effects. It may also be useful to employ regression models in order
to extend the experimental results to groups of the population not represented in the sample. The regression
equations would have some aspect of labour supply as the regressand, or variable to be explained, with the
regressors including the tax parameters (viewed as the experimental variables) and variables acting as proxies
for the experimental unit's individual and social/demographic characteristics. Estimates of the regression
coefficients could be obtained using data on the various experimental subgroups, each of which would face a
different set of values of the tax parameters. The generalisation of the results to include new tax treatments
and new population groups is then achieved by substituting appropriate values for the tax parameters and the
other regressors in the estimated labour supply equations. This generalisation would, of course, be based
upon the assumption that the regression coefficients were the same for the new groups. It would appear that
some combination of these procedures was, for instance, used in the econometric simulations of national MIT
programs based on data from the Seattle-Denver experiment (see Section 5.3, pp.102-108). It would appear
thus because the methods of data analysis used for all the experiments are poorly reported. The lack of
information is due mainly to the unavailability of detailed reports. The discussion of data analysis in this
Appendix is based primarily on Rossi and Lyall (1976, pp.87-104, 108-110) and O.E.C.D. (1975, pp.96-101).
145
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259. WILLIAMS, W. Social Policy Research and Analysis: The Experience in the Federal Social
Agencies. N.Y.: American Elsevier, 1971.
260. WILLIAMS, W. The Struggle for a Negative Income Tax: A Case Study 1965-1970 .Public Policy
Monograph No. 1. Seattle, Washington: Institute of Governmental Research, University of
Washington, 1972.
261. WILLIAMSON, J.B., et al. Strategies Against Poverty in America. N.Y.: John Wiley and Sons,
1975.
262. WRIGHT, S. "Social Psychological Characteristics and Labor-Force Response of Male Heads", in
The New Jersey Income Maintenance Experiment, Volume II. Labor-Supply Responses. Edited by
H.W. Watts and A. Rees. N.Y.: Academic Press, 1977, pp. 321-346.
C. J. THOMPSON, Commonwealth Government Printer

DEVELOPMENT DIVISION: Series of Research Papers
Research Paper No 1 Unemployment Benefit Recipients in Australia, 1970-80: An Analysis (Revised)

(November 1981)
Research Paper No 2 Review of the Characteristics of Lonq-Term Unemployment Benefit Recipients in

Australia, 1970-77 (November 1978)
Research Paper No 3 Changing Fam'ly Patterns and Social Security Protection: the Austraft Scene (March
i979)
Research Paper No 4 Unemployment Statistics in Australia (July 1979)
Research Paper No 5 A Review of the Characteristics of Sole Parents Assisted Under the Social Services Act
(March 1980)
Research Paper No 6 Research Questions on Income Security for Sole Parents (March 1980)
Research Paper No 7 Characteristics of Sole Mothers Receiving State Assistance Subsidised Under the
States Grants (Deserted Wives) Act (March 1980)
Research Paper No 8 Additional Data Requirements of the Department of Social Security (April 1980)
Research Paper No 9 The Relationship Between the Australian Social Security and Personal Income
Taxation Systems. A Practical Examination (December 1980)
Research Paper No 10 Survey of Inval id Pensioners October 1979: Data on Major Causes of Invalidity and
on Other Impairments (December 1980)
Research Paper No 11 The Finance of Social Security. Implications of the Interaction Between Social Security
and Personal Income Tax (December 1980)
Research Paper No 12 Work Incentive Experiments in the United States and Canada (June 1981)
Research Paper No 13 Work Test Failure - A Sample Survey of Terminations of Unemployment Benefit (June
1981)
Research Paper No 14 Statistics on the Distribution of Income and Wealth in Australia (October 1981)
Research Paper No 15 Population Projections and Social Security (November 1981)
Research Paper No 16 As His Wife - Social Security Law and Policy on De Facto Marriage (December 1981)
Research Paper No 17 Taxation Expenditures - Submission by Department of Social Security Law to the
Inquiry into Taxation Expenditures by the House of Representatives Standing
Committee on Expenditure (March 1982)
Research Paper No 18 Sole Parents on Pensions - A Sample Survey of Class 'A' widow Pensioners and
Support Parent Beneficiaries (June-1982)
Research Paper No 19 Financing Social Security: An Analysis of the Contributory ‘Social Security’ Approach
(June 1982)

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WORK INCENTIVE EXPERIMENTS

Research Paper No. 12

WORK INCENTIVE EXPERIMENTS

1.1 The "War on Poverty" 1

2. THE NEW JERSEY EXPERIMENT

Origin and objectives

2.2 The Sample and Experimental Design 36

3. THE RURAL EXPERIMENT

Origin and objectives

3.2 The Sample and Experimental Design 59

4. THE GARY EXPERIMENT

Origin and objectives

4.2 The Sample and Experimental Design 77

5. THE SEATTLE-DENVER EXPERIMENT

Origin and objectives

5.2 The Sample and Experimental Design 89

5.4 Comments 101

6.1 Background 102

Origin and objectives

6.2 The Sample and Experimental Design 106

6.3 Analysis of Data 109

6.4 Comments 110

7.1 Work Incentives and Income Security -

7.2 Possibilities for Social Welfare in Australia -

7.3 Social Experimentation and Public Policy -

APPENDIX ONE : Administrative Features of the 135

1.1 The "War on Poverty"

(ii) a critical reaction to welfare aspects of the "War on Poverty"; and

(iii) the continuing inadequacies of the public assistance system itself.

1.2 Negative Income Taxation

(i) an income tested, categorical scheme;

(ii) a social dividend or demogrant;

(iii) a tax credit scheme;

(iv) a negative income tax.

1.4 Social Experimentation

(ii) technical aspects of experimental design and operation;

(iii) policy relevance; and

(iv) ethical issues.

2. THE NEW JERSEY EXPERIMENT

2.2 The Sample and Experimental Design

TABLE 2.1: RESULTS OF THE SAMPLING PROCEDURE BY CITY

Trenton Paterson- Jersey Scranton Total

Target Households 3,530 14,781 18,002 12,334 48,647

SOURCE: Kershaw and Fair, 1976, p.31.

TABLE 2.2: ALLOCATION OF FAMILIES TO EXPERIMENTAL CELLS OR CONTROL GROUP.

Income Stratum (% of poverty line)

SOURCE: Kershaw and Fair, 1976, p.104

TABLE 2.3: ETHNIC COMPOSITION OF SAMPLE BY CITY

Group Trenton Paterson- Jersey Scranton Total

SOURCE: Kershaw and Fair, 1976,p.36.

TABLE 2.4: ALLOCATION OF FAMILIES BY TREATMENT COMBINATIONS USED IN THE

Guarantee Withdrawal Rate (Per cent)

SOURCE: Kershaw and Fair, 1976, p.13.

TABLE 2.5: CHARACTERISTICS OF CONTINUOUS HUSBAND-WIFE SAMPLE

SOURCE: Watts and Rees, 1977, p.35.

TABLE 2.6: HUSBAND TOTALS: REGRESSION ESTIMATES OF DIFFERENTIALS IN LABOUR

Labour Force Hours

TABLE 2.7: WIFE TOTALS: REGRESSION ESTIMATES OF DIFFERENTIALS IN LABOUR

Labour Force Hours

* Significant at the .95 level (two-tailed test).

Per cent Per cent

** Significant at the .99 level (two-tailed test).

3. THE RURAL EXPERIMENT