Because government transfers provide families with cash and other benefits,
they can have a direct impact on income and poverty. They can also have an
indirect effect, by changing individuals’ behavior (Sawhill, 1988). While an extensive
literature investigates the labor supply effects of government transfers—
particularly the former AFDC program—the literature on the impact of these
programs on poverty tends to focus on direct impacts.9 Since the behavioral
responses predicted by economic theory are expected to lead to reductions in
income as government transfers make it less attractive to earn income,10 estimates
produced by these studies are likely an upper bound. Nevertheless, because of the
structure of government benefits and the definition of poverty, even the direct
effect of government transfers on official poverty rates—which we argue is an upper
bound effect—is expected to be relatively small.